DEV ELO PME 2014 Adam Smiths Theory of Development

DEVELOPMENT ECONOMICS Some Theories Of Economics Development Mhd Fadhil Imanuddin 0910514107 2014  Adam Smiths Theory of Development The Model Adam Smith appears the classical economy; free trade economy; open economy. Here the theory adam smith about the economy development: Natural Law It is the different opinion between two goods. It can be good or worst or called judgement cause each person as the best judge of his/her own interest then left to pursue it to own advantage. It consist of invisible hand (the equilibrium of perfectly competition then tended to maximize and increase national wealth. Divison of Labour or Specialization of Labour Adam Smith’s opinion is each firms must be work as the division cause make the production easier than doing together. It is the result of greatest improvement in productive the strong and powerful of worker and saving much time to produce then becoming unwastefull the time. Technology also important for production cause lead to division labour and expansion of market. Process of Capital Formation Smith said that save and invest also becoming the capital. So, the problem of economy development was largerly the ability of people to save more and invest more. In a country, a capital of individual of antion depands on the single individual capital also increase each person. Thus, the wages fund could be increasedby increasing the rate of net investment. Agents of Growth There are three agents of growth: Farmer : lead to give nutrition or making some raw material of food, such as rice, vegetable, and etc. Same like agriculture activity. Producers : lead to produce the raw material as good as function to society or firm activity Businessman : lead to join, investment, increase innovation, and manage all the economy activities or personally activity They are the agents of progress and economic growth to expand the market. Process of Growth There is prosperity as a result of progress in agriculture, manufacturing industries, and commerce which leads to capital accumulation, technical progress, increase in population, expansion of markets, divison of labour, and rise in profits continously but its not endles A Critical Appraisal Natural law, division of labour, agents of growth has certain weakness: Rigid Division of Society It assumes the existence of a rigid division of society between capitalist(landlords) and labourers. It means smith’s theory is not expand on unspecialization person. If the person doesnt have the divison. Its not function on production. Just the specialization able survive on economy activity. So its so underestimate. One-Side Saving Base Focus on three person have the money to save such as capitalist, landlords, and moneylenders save cause it didnot occur to him and not advanced of society. So the people isnt have money cant give impact to economy. Same with upper weakness. Unrealistic Assumption of Perfect Competition The laissez-faire policy of perfect competition is not appear and found in any economy. Such as private sector, internal, and international trade in every country in the world. Neglect of Entrepreneur Absolutelly, entrepreneur has the role on economy development. The entrepreneur who organise and brings bout innovations lead to capital formation. Otherside, some of entrepreneur is neglect and loading the economy activity. Then give impact and critical of some part. Unrealistic Assumption of Stationary State Smith said that the view the capitalist economy is stationary state, implies the change on a point of equilibrium. There is progress but still steady cause development takes place by “fits and starts” and not uniform and steady. Applicability of Underdeveloped Countries Underdeveloped countries always has the low and little size of market is to small cause the capacity to save and invest still low also give impact to volume of production, productivity is low, implies to low level income. Farmer, trader, and producer can help on economy activity to raise the productivity. Thus, improved technology, division of labour, and expansion market becoming corner stone of policy, as we know that the wealth of nations is dynamic analysis and programme of policy to underdeveloped country. The Ricardian Model Ricardo’s Model Its view on economic development in a unsystematic way. The correspondence consist idea by model development has been built. The theory discussed on theory of distribution. So, ricardo analysis is deviation. Assumption of Model All land is used for production and working help in diminishing distribution in factory. The diminishing return is utility on begining time such as wanna drink coca-cola then there is diminishing return is high after drinking much, diminishing return is low. Law diminishing return operates on land Supply land is fixed Demand goods is perfect inelastic Labour and capital are variable inputs Technical knowledge is given Workers are paid wage Supply labour is constant Demand labour depend on accumulation capital and demand-supply price Perfect competition Capital accumulation result from profit Ricardian model based on three groups interrelations in economy. Here are landlords, capitalist, and labour, among distributed. The total national output is distributed among three groups as rent, profit, and wage. Division of Rent, Profit, and Wages Rent, total rent = average product – marginal product of labour X quantity of labour and capital Wage rate = wage fund / number of workers employed level Process of Capital Accumulation Its outcome of profit cause profit leads to save of wealth which is used for capital formation. It depans on two factors; Capacity to save, is more important rather capital accumulation, depand on net income of society. The will to save, the larger is surplus and the larger will be the capacity to save. Profit Rate Rate of profit = profit/wages. Or the equal to ratio profit to capital employed. Capital consist working capital and equal wage bill. In fact that profits depands on wages, wages on price, price depand on fertility of marginal land. Subsistence wage also falls, however profits increases and more capital accumulation. Hence, wages will rise and profit come down. Increase in Wage The wages isan active role in determining income between capital and labour. The wage rate increases when the prices of commodities forming the subsistence of worker increases. Hence, wages will rise with increase in the price and then profit would come down. Declining Profits in Other Industries The profits of farmers regulate profit of all other trades. Money rate must be equal both in agriculture and industry. When profits decreases in agricultural sector, profits of all trades also decrease. Other Resources of Capital Accumulation It depend on difference between production and consumption. Productivity of labour may be increased through technological changes and better organisation. Invention of machinery, by improvements in skill, by better division labour, or discovery of new markets, wher more advantageous exchanges made. Taxes, is a source of capital accumulation in government. Ricardo doesnt favour the imposition of taxes cause taxes reduce income,profits, and capital accumulation. Savings, it can be formed through expenditure and production by increasing rates of profits and reducing price of commodities. Free Trade, the resources of world can be used more efficiently through foreign trade, however, import capital leads to fall in demand for labour which worse the economic condition of labourers. Stationary State There is a natural tendency to profit rate to fall in economy , thus country ultimately reaches stationary state. When capital accumulation increases by increases in profits, total production increases in profits, total production increases which raises the wages fund. In this word, capital accumulation stops, there is no increases in population, wage rate is at subsistence level, rent is high and there is economy stagnation. A Critical Appraisal Agricultural Development The importance of agricultural development in economic growth cause industrial development depends on it. This sequence had been faded. Profit Rate The importance of increasing the profit rate for capital accumulation.No profit no growth. Importance of Saving The importance of saving for higher capital accumulation. Foreign Trade It leads to maximum utilisation of resources and increases in income also againts on colonial trade. Dynamic Trade It changes in different variables such as population, wages, rent, profit and etc Weakness of The Theory Neglects The Impact of Technology Eventually, when impact of technological progress is exhausted, diminishing returns set in and economy moves towards the stationary state Wrong Notion of The Stationary State Cause no economy attains the stationary state which profits are increasing, production is rising and capital accumulation is taking place. Baseless Notion Regarding Population There has been a continous increase in money wages and population has tended to decline. Unnecessary Importance to Law of Diminishing Return Its under-estimated the potentialities of technological progress in counteracting diminishing returns. Impracticable Laissez-Faire Policy There is no government inteference and economy operates automatically through perfect competition. In fact that there is no economy which is free from government interference and perfect competition be valid. Neglects Institutional Factors It neglects the role of institutional and political factors. However, they are crucial in economic development and cannot be overlooked. Distribution Rather than Growth Theory Ricardian model is not growth theory but its the theory of distribution which determines the shares of workers, landlords, and capitalists. Land also Produces Goods Other Than Goods This is old notion cause land produces a varieety of products other than goods. Factors of production are supported by produce land. Capital and Labour not Fixed Coefficients This assumption is invalid cause labour and capital are independent variables, Neglects the Interest Rate The interest rate as an independent reward of capital but includes profits. This wrong notions stems from his inability to ditinguish between capitalist and entrepreneur. Underdeveloped Countries and Ricardo’s Theory The two basic assumption of the Ricardian model, diminishing returns to land and Malthusian principle of population are particular significance for understanding the problems of over-populated underdeveloped economies. The Classical Theory Introduction It did not progress a systematic theory of economic growth. Adam smith said that general problemof how to create a social and political structure that sustained economic growth. The Classical Model Laissez-faire Policy It mean free trade or free market Capital Accumulation Key Progress It means larger savings. Only capital and landlords are capable to save cause it gets wages to subsistence level. Profit the Incentive to Investment The larger profit, greater capital accumulation and investment Tendency to profits to decline Profit do not increase continously. It tended to come down when competition increases when wages and rent increases by increases in price, profit low. Stationary State It visualize the stationary state at the end of process of capital accumulation. Capital accumulation stop, population becomes fixed and stationary state set. The classical model is explained by time (horizontal) and capital accumulation (dk/dt) (vertical). A Critical Appraisal Ignore Middle Class it means the existence of rigid division of society between capital (landlords) and labourers. Also neglected the role of middle class which provided economic growth. Neglects Public Sector Perfect competition and institution of private sector were essential first prerequisites for economic development. Less Importance Technology Increases in productivity resulted from extra capital and increased division of labour. Technology led to to division of labour and expansion of market. Begining, technological progress action of diminishing returns. Eventually, impact technology progress was exhausted. Unrealistic Law Ending result of capital development is stagnation. It was based two assumption; application diminishing return to land and population. Wrong Nations about Wages and Profits There has been continous increaes in money wages without corresponding down in profit. The mature economics reached stage economic stagnation. Unrealistic Growth Process Stationary state was changes however around point of equilibrium is progress but steady and continous. According economic growth, it doesnt steadily and continously but by fit and start. Mathematical Note The form of production function : Y= F (K,L,T,N) T=F(I) I=F(R) R=F(L,T) L=F(W) W=F(I) Y=R+W Hence, the growth rate the flow national income at time t : The Marxian Theory of Economic Development Introduction Marxism is a religion. As believer in Faith, to orthodox marxist. He predict capitalism and communism have been built like building in Soviet Union, China and other communist countries. The Marxian Model Marx distributed theory to three parts : Materialistic Interpreation of History It attempts to show that all historical events are the result of continous economic stuggle between different classes and groups in society. It is the conflict between the mode of production and the relations of production. The relations of production is uniquely characterised by some components : Labour of division and co-operation, skill of labour, and status of labour Geographical environment and knowledge of resources and materials Technical means and processes and state of science Surplus Value It means the value of someone that gives appearance before and after. It focuss on class struggle under capitalism and basis theory of surplus value that builds superstructure of analysis economic development. Class struggle is outcome of accumulation of surplus value in few capitalists. Marx calls this unpaid work surplus value. The extra labour that labourer puts in and for which revceives nothing called surplus labour. Capital Accumulation The capitalist’s main motive is to increase the surplus which swell profits. Then try to maximize profit in three ways : Prolonging the working day to inrease the working hours of surplus labour. Diminishing the number of hours required to produce the labourer’s food The speeding up of labour, by increasing the productivity of labour. It helps in raising the total output and lowering the cost of production Capital accumulation and concentration involve inrease in constant capital and decline in variable capital. It leads to a relative decrease in the demand for labour. The tendency of falling rate of profits : Capital Crisis Since every capitalist is engaged in introducing new labour-saving and cost-reducing devices the ratio of labour and surplus value to total output falls still further. There is bankruptcies ensue. Every capitalist trie to dump goods in market and process small firms dissapear. Economic crisis appear in the form of an over production of commodities, actue difficulties in finding markets then a fall in prices and sharply, curtailment ofproduction. A Critical Appraisal Surplus Value Unrealistic It concerned not with values but with real tangible prices.it has created an abstract and unreal value world which made difficult and cumbersome to understand the working of capitalism. Marx-A False Prophet. Real wages of worker have continued to rise. The worker have tended to become more prosperous with capitalist development. And middle class instead of dissapearing has emerged as dominant class. Technological Progress Helpful in Increasing Employment This is an exaggerated view for long run effect of technological progress is create more employment opportunities by raising aggregate demand and income. Falling Tendency of Profits not Correct To visualize that technology innovations can be capital-saving too and increase in productivity and total output profit can rise along with wages. Marx Could not Understand Flexibility in Capitalism Democracy as a political system has proved its resilience and adaptability to change change times. The introduction of social security measures, antirust laws and mixed economies. His Cylical Theory is Wrong Capital accumulation led to a reduction in demand for consumtion goods and fall in profit. But failed to realise that with economic development the share wages in aggregate income need to fall nor demand for consumer goods. Two main props being Labour theory of value Modified version of subsistence theory of wages Conclusion Technological progress and innovations are the main stay of any theory of economic developmnet. Similarly, capital accumulation is the fundamental idea behind economic growth. Profits are fixed as both the capitalist development. The Marxian Model and Underdeveloped Countries Marx’s failure to recognize the existence of population pressure make model inapplicable to overpopulated underdeveloped countries. Some of variable of analysis do exist in economies. In underdeveloped countries till recently under colonial rule, labour was being exploited for the benefit of home country. Underdeveloped countries are politically free, wages are near subsistence level, increasing misery of masses is visible, a reserve army of chronic and disguised unemployed exists between two classes, and middle class being virtually non-existent. Marx opinion that to plan development as hurry industrialize. The Schumpeterian Theory It focus on Business Cycles (1939) and Capitalism, Socialism, and Democracy (1942) Meaning of Economic Development It is spontaneous and discontinous change in the channels of circular flow, disturbance of equilibrium, which for ever alters and displaces the equilibrium state previously existing. Spontaneous and discontinous change in economic life are not forced upon it from without but arise by own initiative from within economy and appear in sphere of industrial and commercial life. Development is carrying out of new combination Innovations Introduction of new goods Introduction of a new method of production The opening up of a new market The consequent of a new source of supply of raw materials or semi manufactured goods The carrying out of a new organization of any industry like creation of a monopoly Role of Innovator The entrepreneur is not a man of ordinary managerial ability, but one who introduces something entirely new. It doesnt provide funds but directs using. To perform economic function the entrepreneur requires two things; Technical knowledge to produce new products Power the factors of production in form of credit Capital Profit and Interest Capital is nothing but level by which the entrepreneur subjects to control concrete goods which needs, nothing but means diverting the factors of production to new uses, or new direction to production. The entrepreneur profit is surplus costs between total receipts and outlay. Critical Process Fuction to break the circular flow, innovating entrepreneur are financed by bank credit expansion. Since investment in innovations is risky, they must pay interest on it. New innovation becomes succesful and profit able. Cylical Process As innovators start repaying bank loans out of profits, quantity of money is decreased and prices tend to fall. Profits decline. Uncertainty and risks increase for innovations is reduced and eventually comes to an end. Process of the End of Capitalism Daring innovators are being destroyed by the capitalist system itself which rest on a rational attitude. Technological progress has become the business of teams of trainned specialists. The new lords of business are managers, depersonalize owners and private bureaucrats. This reduce the industrial bourgeoisie to class of wage earners. As a result, institutional framework upon which capitalism and movement toward socialism. Schumpeters Analysis and Undeveloped Countries Different Socio-Economic Order In underdeveloped countries the socio-economic condition are altogether different and prerequisites for development in form of economic and social. Less of Entrepreneur There are low profit expectations and low state of technological do not innovational investment in new plant and equipment. Less adequate power, transport, skilled personnel, etc. Not Applicable to Socialist Countries It have socialist learnings. Social security measures and high progressive income taxes are minimal to development of an entrepreneurial class cause tend to reduce profits. Not Applicable to Mixed Economies In an underdeveloped country, government is biggest entrepreneur. Thus, schumpeters innovator has limited role to play in an underdeveloped country. Institutional Changes and not Innovations Needed It combination of several factors like organizational structures, business practices, skilled labour and values, attitude, and motivations required. Assimilations of Innovations The development process in underdeveloped country is based, not on innovations but on assimilations of existing innovations Neglects Consumption This appraisal is applied in current trend towards the welfare state in demand and consumption. Neglects Savings Importance of deficit financing, budgetary saving, public credit and other fiscal measures in economic development. Neglects External Effects In underdeveloped countries changes do not takes place from economy, outcome ideas, technology and capital. Backward technology, low saving potential, and outmode social. Neglects the Effects of Growth of Population and Wealth High growth rate of population tends to lower growth rate of developing economy. Unsatisfactory Explanation of Inflation Forces In underdeveloped economy the inflationary forces ar very powerful. Social demand, working trought political and labour union channels seeks to extract from economy more than what. Conclusion Schumpeters theory underlines that importance of inflationary is financing and innovations as main factors in economic development. And the method that tries use one time or an other is inflationary financing. The Keynesian Theory The Keynesian theory consist on advanced capitalist countries. Summary of Keynes Theory Actually, total income relates on total employment in a country. The volumeof employment consist on effective demand. Effective demand means real demand; able, capacity. If you want to develop a country, you must develop effective demand, or it called invest. Invest will be decrease unemployment then will be increase income then increases in consumption. The volume of investment depends on the marginal efficiency of capital and the rate of interest. The marginal efficiency of capital is the expected rate of return from new capital assets. Applicability of Keynes Theory to Underdeveloped Countries : It is not related to each socio-economic and it only applies to advanced democrative capitalist economies. Keynesian Assumption and Underdeveloped Countries Cylical Unemployment : It happens during a depression, caused by deficiency in effective demand. Unemployment can be deleted by an increase in the level of effective demand. Thus, keynesian assumption that cylical unemployments are hardly to tenable in underdeveloped economy. Short Period Analysis : It takes by skill and quantity labour, quantity and quality equipment and technique, the competition, taste and habits of society, supervision and organization, and social structure. Closed Economy : Underdeveloped countries are open economies which foreign trade plays a dominant in developing. Excees Supply of Labour and Complementary Factors : It will be analysis by the industries, machines, managers and workers, consumption habits, and function and role. Labour and Capital Simultaneously Uemployed : When labour is unemployed, capital and equipment are also not fully utilized or there is excees capacity. Tools of Keynesian Economics and Underdeveloped Countries Effective Demand : The concept of it is existed to economies where unemployment due by excees saving in such situation levels of consumption and investment through in monetary and fiscal policy term. Prospecity to Consume : In underdeveloped countries, it is no possible to increase production of consumer good on scarcity of cooperant factors, when consumption increases with rise in income, so price is increase and employment too. Prospensity to Save : To underdeveloped countries that saving is good and not worse. Marginal Efficiency of Capital : there is relationship between invest and marginal efficiency of capital. When invest rise then MEC down, and so on. But it is not exist on underdeveloped countries. Rate of Interest : The rate of interest in underdeveloped countries is not applicable by demand and supply of money as traditions customs and institutional factors. The Multiplier : Following by; involutary assumption, supply curve of output upward slope, excees capacity and comparatively elastic supply for increase output. Policy Measures : For underdeveloped countries, consumption and investment should be increase simulatneously, however it cannot be denied that keynesian policy do not apply in under developed. The Harrod-Domar Model This model based on experience of advaced economies and applicable on analysis steady state. Harrold and Domar analyse that there is invest then decrease in unemployent and increase in income, then going to invest again. Requirement of Steady Growth If full emploment is to be maintained in long run, net invest should expand continously. It requires continous growth in real income at a rate sufficient to ensure full capacity use growing stock of capital. The Dommar Model Increase in Productive Capacity : Consist on supply side created by capital equal to average of increase real income or output to an increase in capital. The supply side of our system is increase in output which economy can produce. Required Increase in Aggregate Demand : By Keynesian multiplier. Increase in income by and increase in investment by I and tend to save by (alpha) = and Equilibrium : In order to mantain full employment. Aggregate demand must be equal to aggregate supply. Income must grow. It is equilibrium rate of growth. The Harrold Model This model show steady in equilibrium growth. It based on three categories; First is actual growth rate (saving and capital-output) by equation GC=s where G is rate of growth of output, C is net addition to capital, s is average to save. S depend on Y,I depends on change of Y. Second is warranted growth rate (full capacity growth rate of income) by equation GwCr=s where Gw is full capacity rate of growth of income, Cr is capital requirements, s is average to save. Last is natural growth rate is welfare optimum or potential full employment rate growth by equation Gn. Cr=ors where Gn is natural or full employments rate of growth. Domar Model = Harrold Model = I=S Points of Differences Domar Model Harrold Model Reciprocal of marginal capital ouput ratio and multiplier Marginal capital output ratio and accelerator Accommodated in his model by allowing average productivity of investmnet to fluctuate Business cycle is an integral part of the path of growth Demonstrates the technological relation between capital and full capacity growth in output Behaviour relation between rise in demand and current output and capital on the other Conclusion : So it exist from above that Harrold-Domar models based on unrealistic assumption. It has little applicable on underdeveloped countries which learn by walk on its own feet, work hard then adopted by under this techniques, saving income ratio and capital output each period. The Kaldor Model of Distibution The Kaldor model is an attempt to make the saving income ratio a variable in growth process. It is based on classical saving function. It applies that saving equals the ratio of profits to national income. Assumption of the Model There is a state of full employment National income or output consist of wages and profit. The marginal prospensity to consume of workers is greater than that of capitalist The investment output ratio is an independent variable The interpretative value of this model depend on treating investment rather the ratio of investment to output as an independent variable, invariant with respect to changes in sp and sw. This along with the assumption of full employment shows that the level of prices in relation to the level of money wages is determined by demand. If there is a rise in investment it will increase demand which will raise prices and profit but reduce real consumption.Prof. Kaldor concludes hence, the warranted and natural rates of growth are not independent of one another if profit margins are flexible the former will adjust itself to the latter through a consequential change in P/Y. A Critical Appraisal The model shows that the share of profit to income P/Y, the rate of profit on capital and real wages rate are function of I/Y. But this is true only under certain conditions. First, the real wages rate cannot be below a certain minimum subsistence rate. Second, the share of profits cannot be fall below the risk premium rate, which is the minimum profit rate necessary for including capitalist to invest. Third, the share of profit cannot be below the degree of monopoly rate, a minimum rate of profit on turn over due to imperfect competition, collusive, agreements, etc. Lastly, the capital output ratio should be independent of the rate of profit. Otherwise, I/Y will itself be dependent on rate of profit. We may conclude with Prof.Sen: The Kaldor model of distribution is based on a number restrictive assumption, it is not easy to marry this macro-model to assumption of individual behaviour and combine it with attempted profit maximation requires that a)expectation be unfullfilled which may be all right b)this should be lead to no feedback in entrepreneurial decision making which is not all right. What is less clear is whether the Kaldor model provides a satisfactory alternative or involves a jump from the frying pan to the fire. Joan Robinson’s Theory of Capital Accumulation The neo-classical models of economic growth developed by Joan Robinson, N Kaldor, and J.E Meade are based on these factors but they studying their behaviour during a process of growth over time with the help of Keynesian and Harrold-Domar model techniques. Thus, they are an attempt to put new wine in old bottles. The Robinson Model Mr. Joan Robinson in her book “The Accumulation of Capital” builds a simple model of economic growth based on the capitalist rules of game. Its Asumptions : a)there is laissez faire closed economy b)in such an economy capital and labour are the only productive factors c)in order to produce given output, capital and labouraare employed in fixed proportions d)there is no technical progress e)there is no shortage of labourand entrepreneurs can employ as much labour as they wish f)there are only two classes-the workers and entrepreneurs-between whom national income is distributed g)workers save nothing and spend their wage income on consumption h)entrepreneurs consume nothing but save and invest their entire income(from profits) for capital formation i)there are no changes in rice level The Golden Age Joan Robinson characteriises it as a golden age to describe smooth, steady growth with full employmnet. When technical progress is neutral and proceeding steadily with out any change in time pattern of production, the competitive mechanism working freely, population growth at a steady rate and accumulation going on fast enough to supply productive capacity for all available labour, the rate of profit tends to be constant and the level of real wages to rise with output per man. The Various Golden and Platinum Age The Limping Golden Age The rate of steady state capital accumulation takes places below the full employment level. The stock of capital equipment is sufficient for desire rate of capital accumulation but its not enough to employ the whole labour force. The Leaden Age Employment is increasing very slowly the ratio of non-employed to employed workers increases as a result the standard of life for workers falls The Restrained Golden Age The desired rate may be held in check in two ways. First through financial stringency when in a full employment economy firms desire to employ more labour. Second, through monopsony in labour market when the productive capacity of firms is under utilised due to the scarcity of labour The Bastard Golden Age The possible growth rate is kept down by real wages being at the tolerable minimum. In this age capital stock is not growing faster cause of inflationarry pressure. The Galloping Platinum Age In this age there is unemploy to start with firms are engaged in enlarging the investment sector. As it expands more labour is employed and rate of profit rises. The Creeping Platinum Age This age begins with a full employment situation where a rates of accumulation and profit are very high and growth of labour force is not keeping pace with growing stock of capital. The Bastard Platinum Age When technical progress is taking place then even with a constant level of wage rate, the rate of accumulation is increaseing without causing inflation. A critical Appraisal Mrs, Robinson Model is an elaboration of Harrod growth model. The potentail growth ratio is Harrod’s natural growth rate. In golden age, the actual (G) and natural growth (Gn) rates are equal to each other and the warranted growth rate (Gw) conforms to them. It Applicability to Underdeveloped Countries It has following merits for underdeveloped countries, studied the problem of population and its effect on rate of capital accumulation in developing economy. There is a golden age which any country can achieve through planned economic development. Weaknesses of the Model Low rate of capital accumulation in relation to potential growth rate It is always less than its potential growth ratio that is why it is backward and possesses surplus of labour force. Closed Economy It is unrealistic assumption cause underdeveloped countries are open rather tahn closed economyin which foreign trade and aid play crucial roles in accelerating the growth rate. Neglects Institutional Factors The role of institutional factors as one of determinants of economic growth cannot be neglected in any model Constant Price Level Such economic move on the path to progress, investment has to be increased continously which tends to raise the demand for factors but their supply cannot be increased to match in demand. Rise in price is inevitable with development Thus, it is not possible to use concept golden age in solving the problem of development planning for unchanging continuity required for golden age is not present in an underdeveloped economy Meade’s Neo-Classical Theory of Economic Growth He has constructed a neo-classical model of economic growth which is designed to show the way in which the simplest form of classical economic system would behave during of equilibrium growth Assumption of The Model There is a laissez faire closed economy where there is perfect competition Constant returns to scale Consumption of goods and capital goods Machines are form of capital in economy There is constant money price of consumption goods Land and labour All machines are assumed to be alike Ratio of labour to machinery can be changed both in long run and short run There is perfect subsistutability 10.Assumption of depreciation by evaporation The Model The net stock of capital available in form of machines The amount of available labour force The availability of land and natural resources The state of technical knowledge with continues Y=F(K,L,N,t) where Y is net output or net national income, K the existing stock of capital (machines), L the labour force, N land and natural resources and t is time, signifying technical progress. The State of Steady Growth It is state in which the growth rate in total output (income) is constant and so in the growth rate in income per head. It is assumed that population is growing at a constant proportionate rate (I) and the rate of technical progress doesnot change. A Critical Appraisal It is not applicable to underdeveloped countries Perfect competition It is classical tradition of a perfectly competitive economy where all production units are assumed independent of each other Constant returns to scale It is also defective. The fact is that there are increasing return to scale rather than constant returns in growth process. Pseudo-classical relation Cause it merely states than monetary policy keeps prices of consumption goods constant while money wage rates ensure full employment Perfect malleability of machines Meade side tracks the problem of foresight by assuming all machines alike and perfect malleability of machines. This makes his model impracticable No place for uncertainty The interrelations of all variables have been regarded as certain. This detracts from the practicability of model and it simply remains a theoritical analysis Closed economy This is an unrealistic assumption of a closed laissez faire economy Neglects institutional factors Prof. Meade forgets that social, cultural, political and institutional factors play an important part in economic growth Mathematical model It becomes difficult to understand cause contains a number of equations based on complex interrelation of various variables. Conclusion Meade model has the chief merit of demonstrating the influences of population growth, capital accumulation and technical progress on the growth rate of national income and per capita real income over time. Rostow’s Stages of Economic Growth Rostow distinguishes five steges of economic growth: 1. The traditional society, 2. The pre-conditions for take-off, 3. The take-off, 4. The drive to maturity,and, 5. The age fo high mass-consumption. The Traditional Society It defined “as one whose structure is developed within limited production functions based on pre-newtonian science and technology and as pre-Newtonian attitudes towars the physical world. The Pre-Conditions for Take off First, a build-up of social overhead capital especially transport Second, a techological revolution in agriculture Third, an expansion of imports , financed by production and market. The Take-off It is great watershed in the life of a society when growth becomes its normal condition forces of modernization contend againts the habits and institutions. Conditions for Take-off A rise in rate of productive investment form The development of one or more substantial manufacturing sectors with high rate growth The existence of quick emergence of polotical, social, and institutional framework The Drive to Maturity It as the period when a society has effectively applied the rangeof then modern technology to the bulk of its resources. It is a period of long sustained economic growth extending well over four decades. The Ages of High Mass-consumption It has been characterized by the migration to suburbia,the extensive use of the automobile,the durable consumers’ goods and household gadgets. ‘’the balance of attention of the society is shifted from supply to demand,from problems of production to problems of consumption and of welfare in the widest sense’’. Importance and Limitations of Take-off for Underdeveloped Countries Importance “The term lacks precision and yet it is suggestive and can be given interpretation which is useful for an understanding of the process of economic development of an underdeveloped country.It is indeed the vagueness of the term that gives it strength for one can put an interpretation upon it to suit the conditions of the economy in which one is interested.” Limitations -Capital output ratio not constant: this assumtion is valid in case of advanced economies. But underdeveloped economies are characterized by the predominance of agriculture and primary conditions. -Silent over the removal of unemploymnet: it is imperative for an over-populated cuntry, to have the elimination of unemployment as one of conditions for take-off. -Elements of ambiguity: this does not seem to be a sensible interpretation. For even in a highly developed economy the average rate of saving may not remain constant -Economic development not spontaneous: a take-off is not an instantaneous process -Aeronautical concept not correct: it very ainful process which every underdeveloped country has to go through. The Take-off and India India which entered the take-off stages in 1950-51 can be definitely said to have taken-off in the year 1964-65 when both the saving investment ratios were above 10 per cent. The Indian economy had taken-off during third plan. It was conceived as the first stage of decade or more of intensive development leading to a self-reliant and self-generating economy. The Doctrine of Balanced Growth Meaning of Balanced Growth It has several authors who interpret it in their way. To some it means investing in a laggard sector or industry so as to bring it a breast of others. It implies that investment takes place stimulately in all sectors or industries and agriculture. Explanation of the Theory Rosenstein Rodan was the first economist who propounded the theory of balanced growth without using these words in his 1943 article. He argued that the whole of industry to be created in eastern and south-eastern Europe should be treated and planned like one huge firm or trust. His main contention was that “often SMP(Social Marginal Product) of an investment is different from its PMP (Private Marginal Product) and that when a group of industries are planned together in accordance with their SMPs, the rate of growth of the economy is greater than it would have been otherwise. How to break these circle? Individual investment decisions cannot solve the problem. The new industry is likely to fail for want of an adequate market. How can market be enlarged? The size of market can be enlarged by monetary expansion, by salesmanship and advertising by abolishing trade restrictions and by expanding the economic infrastructure. To sum up in the worlds of Lewis: “in development programmes all sectors of the economy should grow simultaneously, so as to keep a proper balance between industry and agriculture and between production for home consumption and production for export the logic of this proposition is as unassailable as its simplicity. Criticism of the Doctrine of Balanced Growth Rise in Costs A simultaneous establishment of number of industriesis likely to raise money and real costs of production and so make them economically unprofitable to operate in the absence of sufficient capital equipment, skills, cheap power, finance and other necessary raw materials. No Attention to Reducing Costs It doesnt consider the possibility of cost reductions in the existing industries. Other Problems Whereas the balanced growth doctrine assumes that the relationship between industries is for the most part complementary, the limitation of factor supply ensure that the relationship is for the most part competitive. Fails as a Theory of Development This is not growth it is not even the grafting of something new on to old something old. Its a pefectly dualistic pattern of development. Beyond the Capabilities of Underdeveloped Countries The advantages of multiple development may make interesting reading for economist but they are gloomy news indeed for underdeveloped countries. Disproportianality in Factors This is a great hindrance to th practial application of the concept of balanced growth. Shortage of Resources Perhaps guerilla tactics are more suitable for the circumstances of underdeveloped countries than a frontal attack. Wrong Assumption of Increasing Returns Decreasing and not increasing returns favour balanced growth. Capital Lumpiness not Essential for Development Think big is sound advice to underdeveloped countries but act big is unwise counsel if it spurs them to do more than their resources permit. 10.Balanced Growth not Essential for Induced Investment Balanced growth is not, as nurkes supposed to be desired to induce private investment but to be desired for its own sake. 11.Doesnt Consider Planning It is primarly related to a private enterprise where the need for planning doesnt a rise. 12.Concept of Balanced Growth Applicable to Developed Countries Economy activity is static. Capital, skills, factor supplies and economic infrastructure are woefully lacking. 13.Scarcities and Bottlenecks Encourage Growth It is on unbalanced growth that the history of technological progress rests The conclude with Dr Singer that the doctrine of balanced growth is premature rather than wrong in the sense. It is applicable to a subsequent stage of sustained growth. The Concept of Unbalanced Growth It is oposite of doctrine of balanced growth. Investment should be made in selected sectors rather than simultaneously in all sector of the economy. No underdeveloped country possesses capital and other resources in such quantities as to invest simultaneously in all sector. Rostow’s View For an economy to cross the stage of traditional society and to achieve the take-off. It is only possible if investment is made in one or two leading sectors of economy. Hirschman’s Strategy It is his contention that deliberate unbalanced in economy, according to a pre-designed strategy, is best way to aachieve economic growth in an underdeveloped country. Investment in strategically selected industries or sectors of economy will lead to new investment opportunities and so pave the way to further economic development. Unbalancing the Economy with SOC Social Overhead Capital has been defined as comprosing those basic services without which primary, secondary, and tertiary productive activities cannot function. In SOC are included investments on education, public health communication, transportation and conventional public utilities like light, water, power, irrigations, and draignase schemes, etc Unbalancing the Economy with DPA A government might directly or indirectly invest in Directly Productive Activities instead of investing in SOC. If DPA investment is undertaken first, the shortage of SOC facilities is likely to raise production costs substantially . The Path to Development The primary production activities mostly of the enclave type leading to exports have little development effects on the economy in adding either to employment ot to gross national product in an underdeveloped country. Last Industries First In making Industrial products, a developing country need not undertake all the stages of production simultaneously but it can import many converting, assembling and mixing plants for final touches to almost finished products. A Critical Appraisal It is realistic and takes into account almost all aspects of development planning. The various incentives, obstacles and resistance to development are studied in their proper perspective. Appears to be in favour of a mixed economy. Its limitation Inadequate Attention to the Composition, Direction, and Timing of Unbalanced Growth The crucial question is not whether to create imbalance, but what is the optimum degree of imbalance, where to imbalance and how much in order to accelerate growth, which and where should the spearhead be trust, on which slope snowballs grow into avalances. Neglects Resistances Hirschman neglects this type reation on the part of existing institutions in underdeveloped countries. Beyond the Capabilities of Underdeveloped Countries The pressure and tensions are bound to be serious in underdeveloped countries thereby hampering the process of development. Lack of Basic Facilities It difficulties in procuring technical personnel, raw materials, and basic facilities like power and transport. Lack of Factor Mobility It is difficult to shift resources from one sector to another. Emergence of Inflationary Pressure It becomes difficult to control prices in underdeveloped countries as the governments are incapable of wielding monetary and fiscal measures effectively. Linkage Effects not Based on Data Linkage effects suffers from the fact that its not based on data pertaining to an underdeveloped country where social overhead facilities are not fully developed for a generation or so. Too much Emphasis on Investment Decisions Hirschman lays to much emphasis on investment decisions as dompared to other important decisions essential for development. Conclusion The technique of unbalanced growth has come to be recognised as a novel technique for the development of underdeveloped countries. The continous rise in price level however tends to keep the real consumption standard low. Unless the government controls the inflationary pressure, planning with unbalanced growth will fail to achieve sustained growth. The “Big Push” Theory Rosenstein-Rodan’s Thesis It is associated with name of Proffesor Paul N. Rosenstein-Rodan. The thesis that a big push or a large comprehensive programme is needed in the form of a high minimum amount of investment to overcome the obstacle to development in an underdeveloped economy and to launch it on the path to progress. Rosenstein-Rodan distinguishes between three different kinds of indivisibilities and external economies: Indivisibilities in the Production Function Indivisibilities of inputs, output, or processes lead to increasing returns. Therefore, a high initial investment in social overhead capital is necessary in order to pave the way for quick-yielding directly productive investment Indivisibility of Demand It requires simultaneous setting up of interdependent industries in underdeveloped countries. It is the indivisibility of demand which necessitates a high minimum quantum of investment in interdependent industries to overcome the small size of the market and low inducement to invest in underdeveloped countries. Indivisibility in the Supply of Savings A high minimum size of investment requires a high volume of saving. This is not easy to achieve in poor underdeveloped countries cause of very low level of income. A climate for development is only created when investment of a minimum speed or size is made within an underdeveloped economy. A Critical Appraisal It is thus primarly a theory of investment concerned with imperfect markets in underdeveloped countries. It is a high minimum quantum of investment rather than price mechanism in such imperfect markets that takes an underdeveloped economy towards an optimum position. Its Defects Negligible Economics from Investment in Exports and Import Subsitutes The external economies arguments for a big push loses its justification cause external economies are negligible in the above types of investments Negligible Economies even from Cost-Reducing Investment Since external economies accrue from the ouput-expansion in the initial industry, they are negligible in the case of cost-reducing investment. Neglects Investment in the Agriculture Sector It emphasizes the importance of a high level of investment in all type of industries-capital goods, consumer goods and social overhead capital. Generates Inflationary Pressure These inflationary pressures in turn would prolong the process of building overhead capital, thus making it highly difficult for an underdeveloped country to achieve rapid economic development. Low Investment Leads to Larger Increases in Output Thus there appears to be little conclusive proof that a big push of investment is a prerequisite for economic development of underdeveloped countries. Administrative and Institutional Difficulties It is based upon a burst of state-engineered investment. This leads to mutual rivarly and suspicion which are inimical to a balanced growth of economy. Not an Historical Fact Thesis is a sort of prescription for launching underdeveloped countries on the path to progress rapidly in presents. Historically, the presence or absence of a big push has not been a distinguishing feature of growth anywhere. Leibenstein’s Critical Minimum Efforts Thesis Leibensteins Theory It has developed the thesis that underdeveloped countries are characterized by vicious circle that keep them around a low income per capita equilibrium state. According to Leibenstein, every economy is subject to shocks and stimulants. A shock ha sthe impact of reducing per capita icome initially while a stimulant tends to increase it. Population Growth a Function of Per Capita Income It should be noted that Leibenstein regards the critical minimum efforts that would lead to austained real income growth involving an optimum time pattern of expenditure of effort. Other Factors Thus the critical minimum effort should be much above the subsistence income level to generate the path of sustained economic develoment. Growth Agents They are entrepreneur, the investor, the saver, and the innovator. Incentives Whether or not the growth agents expand will depend on the anticipated outcome of such activities, the actual results, and on the incentives for further expansion or contraction generated by the interactions of the anticipation, the activities and the results. Leibenstein’s Projections He has also estimated the size of the critical minimum efforts in the case of an underdeveloped economy with a starting population of one million. A critical Appraisal Population Growth Rate Related to Death Rate It is based on assumption that the rate of growth of population is an increasing function of level of per capita income up to a point but beyond that is a decreasing function of the latter. Decline in Birth Rate not due to Increase in Per Capita Income It cannot be attributed to an increase in per capita income at the crirical minimum level which surpasses the growth rate of population Ignores State Efforts to Reduce Birth Rate Leibenstein ignores the State action in bringing down the fertility rate. Reach the stage of population explosion thereby creating more problems than she can solve by rise in per capita income. Higher than 3 per cent Growth Rate does not Lead to the Take-off Neglects Time Element The theory fails to take into account the time element which is required for sustained efforts during which fundamental changes in institutional and productive structure should be taking place for ensuring as succesful take-off. Complex Relation between Per Capita Income and Growth Rate The functional relationship between the level of per capita income and rate of groth in total income is more complex and not so simple as has been shown by Leibenstein. Applicable to Closed Economy It doesnt explicity explain the influence of foreign capital and other external forces on levels of income, saving and investment. Lewis’ Theory of Unlimited Supplies of Labour He has developed a very systematic theory of Economic Development with Unlimited Supplies of Labour. Lewis starts his model with assertion that the classical model of perfectly elastic supply of labour at a subsistence wage holds true in the case of a number of underdeveloped countries. Such economies are over-populated relatively to capital and natural resources so that the marginal productivity of labour is negligible, zero or even negative. Capitalist Surplus It depends upon minimum earnings required for subsistence. The supply of labour is however considered to be perfectly elastic at the existing capitalist wage. Since the marginal productivity of labour in the capitalists sector is higher than the capitalist wage. This is result in capitalist surplus. Capital Formation Depends on Capitalist Surplus This surplus is reinvested in new capitalist assets. Capital formation takes places and more people are employed from subsistence sector. The process continues till the capital labour ratio rises and supply of labour become inelastic. Role of State and Private Capitalists Once a capitalist sector has emerged, observe Lewis, it is only a matter of time before it becomes sizable. If very little technical progress is occuring the surplus will grow only slowly. But if for one reason or another the opportunities for using capital productively increases rapidly, the surplus will also grow rapidly, and the capitalist class with it. Capital Formation through Bank Credit This analysis also applies to the government which receives back the inflation-financed money in form of taxes. Since backward economies are faced with unlimited supplies of labour the Lewis model is primarly concerned with this problem. End of the Growth Process The model shows that if unlimited supplies of labour are available at a constant real wage and if any part of profits is reinvested in productive capacity, profits will grow continously relatively to the national income but the process of growth cannot go on indefinitely. In Open Economy The application of this model to underdeveloped countries will therefore create balance payments difficulties. Thus Lewis suggests stricts exchange control measures for such economies. A Critical Appraisal Every UDC does not have an Unlimited Supply of Labour It is unrealistic in the case of many countries are sparsely populated. Skilled Labour not a Temporary Bottleneck Skilled labour is regarded as a temporary bottleneck which can be removed by providing training facilities to unskilled labour. Lack of Enterprise and Initiative In fact, the entire process growth depends on existence of such a class which has the necessary skill to accumulate capital. Multiplier Process doesnot Operate in UDC It is not applicable to underdeveloped countries Neglects Total Demand It so happens the growth processmay come to a halt much earlier through an unfavourable terms of trade or subsistence sector adopting new techniques of productions to meet the expanding raw material demand of capitalist sector. Mobility of Labour not so Easy Higher capitalist wage will not lead to the movement of surplus labour from the subsistence sector to the capitalist sector. Marginal Productivity of Labour not Zero The fact is that every worker receives the subsistence wage may be kind if not in cash Productivity falls with Migration of Labour from the Subsistence Sector The fact is that with workers from farms will reduce ouput. Low Income Groups also Save Infact, as Lewis himself admits in the case of Japan, people with low income also save in underdeveloped countries. In such countries, low income groups save due to social reasons. 10.Inflation not Self Destructive The marginal prospensity to consume of people is near unity, so that all increases in income lead to inflationarry rise in prices. 11.Inefficient Tax Administration It cannot be accepted cause tax adm in underdeveloped countries of people is near unity so that all increases in income lead to inflationary rise in prices It may be concluded Lewis model has outstanding merit of explaining in a very clear cut way the process of development. Dualistic Theories Social Dualism He has been one of the pioneers who developed a distinctive theory applicable only to underdeveloped countries. His theory of social dualism is a general theory of economic and social development of underdeveloped economies. Meaning He maintains that there are three characterised of society in economic sense. They are social spirit, the organizational forms, and techniques dominating it. Characteristics of Dualistic Society To describe and to explain the economic interactions of two clashing social systems which he terms dualistic economics or eastern economics. He bases his theory largerly on the Indonesian experience. Native industry has practically no organization, is without capital, technically, helpless, and ignorant of market. Implicability of Western Economy Theory Western economic theory is meant to explain capitalist society whereas the eastern society is pre-capitalistic. The urge for development should come from people themselves. New leaders must emerges who should work towards goal of economic development with faith, charity and patience. A Critical Appraisal Wants not Unlimited People in underdeveloped economies have limited wants or backward-sloping supply curves of efforts and risk taking is not borne out by experience of Indonesia itself. Casual Labour not Unorganized Casual labour may not be fully organized in agriculture but in tea, coffee and rubber plantations the trade union movement is the stronger in such economies. Eastern Labour not Immobile Higgins opines that i see no evidence that oriental labour is intrinsically more immobile than western labour. Not Peculiar to Underdeveloped Economies Rather every economy can be divided into distinct regions with different degrees of technical advance. Applicable to Western Societies They have recently developed a whole field of analysis relating to liquidity preference and safety preference to take account of reluctance of investors the world over to accept risk or illiquidity and their strong preference for keeping their capital in safe and liquid form. Not a Theory but Description Western economic theory is inapplicable to eastern societies is based on the neo-classical theory which has limited applicability even in the western world. Tools of Western Economic Theory used in Eastern Societies The solution to the problem of underdevelopment can be found by applying familiar tools of economic and social analysis. Doesnot Provide Solution to the Problem of Unemployment Regards unemploymentof various types as beyond the reach government help and makes no mention of underemploymnet which is dominant feature of densely populated underdeveloped economies. Conclusion In fact, important problem in dualistic economies is one of providing adequate employment opportunities to existing and perspective underemployed labour force. This is a more ralistic dualistic theory on pattern of development Techological Dualism It implies the use of different production function in the advanced sector and traditional sector of an underdeveloped economy. In fact, underdeveloped countries are characterised by structural sisequilibrium at factor level. It may arise either cause a single factors receives different returns in different uses or cause price relationship among factors are out of line with factors availabilities. In reality however, technical coeficients are not so rigidly fixed, rather they are somewhat flexible. Thus they would prefer to have fied technical coeficients. Accordingly, these factors perpetuale the tendency toward technological dualism in underdeveloped countries. A Critical Appraisal Coefficient not Fixed in Industrial Sector it is doubtful that productions in industrial sector has been actually carried on with fixed coefficients Factor Prices do not Depand upon Factor Endowments This is vitally connected with pattern of factors but factors prices do not solely depend on factor endowments. Neglects Institutional Factors there are many institutional and psychological factors that also influence factor proportions which have been neglected bu Higgins. Neglects the Use of Labour Absorbing Techniques It was due to the application of better seeds, improved methods of cultivation, increasing use of fertilizers, etc. Size and Nature of Disguised Unemployment not Clarified It does not clarify the nature of disguised unemployment in rural sector and excees labour supply in industrial sector. Myrdal’s Theory of Backwash Effects It is a circular causation process whereby the rich are awarded more favours and the efforts of those who lag behind are twarted. The backwash effects predominated and spread effects are dampened. In an underdeveloped countries a circular and cummulative process also known as the visious circle of poverty operates downwards and being unregulated causes increasing inequalities. The Myrdal Thesis He builds his theory of economic development around the idea of regional inequalities on national and international planes. He defines backward effects as all relevant adverse changes of economic expansion in a locality caused outside that locality. Regional Inequalities It has non economic basis. It is associated with the capitalist system which is guided by profit motive. The results in development of those regions where the expectations of profits are high while other regions remains underdeveloped. The Backwash Effects of Migration, Capital Movement and Trade The localities and regions where economic activity is expanding will attract young and active people from another parts of country. Capital movements also tends to increasing regional inequalities. In these regions, also not only manufacturing industry and other non-agricultural pursuits but agricultural itself show a much lower level of productivity than in richer regions. The Spread Effects The spread effects flowing from a centre of industrial expansion to other localities and regions, operating through increased demands for their products and in many other ways, cumulating social process by circular causation. Backwash vs. Spread Effects In contrast, the major cause of backwardness of underdeveloped countries has been the weaker spread effects and stronger backwash effects whereby in cumulative process poverty becomes its own cause. The Role of the State The free play of market forces and the laissez faire policy have been the two potent forces in creating regional inequalities in the presence of weaker spread effects. International Inequalities Unhampered trade between two countries of which one is industrial and the other underdeveloped, strengthen the former and improverishes the latter. Increased export earning leads to inflationary pressure, malallocation of investment expenditure and balance of payments difficulties when they are wasted in speculation, conspicuous consumption, real estate, foreign exchange holdings, etc. Capital Movements It has also failed to counteract international inequalities, since advanced countries themselves offer to investor both goods, profits, and security, capital will shun underdeveloped countries. Basically, the weak spread effects as between countries are thus for larger part only a reflection of the weak spread effects within underdeveloped countries themselves caused by low level of their development atatined. A Critical Appraisal Myrdal combines national and international forces which have tended to keep the underdeveloped countries of world in the cumulative process where poverty becomes it own cause. A great gap has developed between import and export of underdeveloped countries which has made their economic development a costly and lengthy affair. The Mahalnobis Model He constructed a four sector econometric model as a basis for the formulation of India’s draft framework of Second Five Year Plan. It is mathematical in nature and is based on the technique of operational research as appliesd to development planning. Operational research, therefore, requires the formation of set preference functions in an open end system. The Mahalnobis Model The investment goods sector (k) The factory produced consumer goods sector (C1) The small or household produced (including agricultural products) consumer goods sector (C2) Services (health, education, etc) producing sector (C3) In a given time period in order to achieve a certain growth rate for economy, the total investible amount has been divided in such way that it leads to required growth rate. But since the required growth rate is to be reason ably high it can achieve by expanding sector k and thereby producing larger quantities of investment goods. However, investment in sector k is bound to generate increased purchasing power and hence demand for consumer goods which require comparatively less capital but employ more labour. A Critical Appraisal Fails to Solve any Definite Welfare Function The numerical solution of model, however dosenot point towards any definite welfare function without which it is not possible to arrive at an optimum allocation of resources. Arbitary Value Somewhat arbitrary and may not help the planners in arriving at correct solutions for optimum allocation of investment of different sectors of economy. Technique not Applicable to Open Economy Be applied to a model of open economy where the system it not homogenous. Supply of Agricultural Produce not Infinitely Elastic This is untenable demand for food and raw material ever since the beggining of Second Five Year Plan. Supply of Labour also not Infinitely Elastic What is required for productive structure is not simple labour but skilled and trained labour and management. Production Technique not Constant In fact, technological change is bound to occur during the process of development. Thus his model does not seem to take us very far. Arbitrary Values for Structural Parametres The assumption of independence between capital-output ratios is not realistic. These parameters may change in process of development. Silent over Investment in a Mixed Economy It is silent with regard to this important problem of development planning in a democrartic country with a mixed economy. Ignores Factor Prices He ignores the pattern of factor prices while fixing targets on basis of his model. 10.Closed Economy He ignored the impact of foreign trade on variables of model and deprived it of element of reality. 11.Neglects Demand Function Model quietly ignores these important problem for sake of mathematically simplicity. Conclusion Mahalanobis model was instrumental in putting the Indian economy on right path to development planning with Second Five Year Plan and paved the way for subsequent bolder Plans. The Fel’dman Model It is a theoritical model which is concerned with longrun planning. Assumption of the Model It assumes constant price in economy Capital is assumed to be the only limiting factors There are no lags in growth process There is a closed economy Production is assumed to be independent of consumption There is no government expenditure except on consumption and investment There are no bottlenecks in economy The supply of labour is unlimited The Model The division of economy between two categoriesis complete in the sense that no existing capital can be transferred from one to another. Thus, the rate of investment is rigidly determined by capital coeficient and stock of capital. Comparison with the Domar Model Proffesor Domar compares his model of growth with the Fel’dman model thus in Domar model indicates both marginal and average propenisties to save and v is overall capital coefficient. In other words, in a growing economy some capital is used to make more capital. The explicit recognition of this fact is one of virtues of Feldman model. Implications for Economic Development Fel’dman treated the magnitudes of his capital coefficients as variables for purpose of economic development. If purpose of economic development is maximisation of investment or national income at a point of time, or their respective rates of growth or of integrals overtime. Y should be set as high as possible. It contains an important element of truth: a closed economy without well-developed metal,machinery and subsidiary industries (complex of so-called heavy industries) is unable to produce a sizable quantity of capital goods and thus to invest a high fraction of its income, high its potential saving prospensity. The Solow Model of Long-Run Growth He builds his model of economic growth as an alternative to Harrold-Domar line of thougt without dubious assumption of latter. Harrod-Domar model is at best a knife-edge balance in long run economic system where the saving ratio, the capital output ratio, and rate of increase of labour force are key parameters. According Solow,this delicate balance between Gw and Gn flows from the crucial assumption of fixed proprotions in production whereby there is no possibility of subsituting labour for capital. Assumption One composite commodity is produced Output is regarded as net output after making allowance for depreciation of capital There are constant returns to scale. In the word, the production functions is homogenous of first degree The two factors of production-labour and capital-are paid according to their marginal physical productivities Prices and wages are flexible There is perpetual full employment of labour There is also full employment of available stock of capital Labour and capital are subsitutable for each other The Solow Model Solow takes ouput as a whole, the only commodity in economy. It is rate of production is designated as Y(t) which represent the real income of community part of its consumed and rest of saving is sY(t). K(t) is stock of capital. Solow regards n as Harrod’s natural rate growth in absence of technological change and L as available supply. Possible Growth Patterns Professor Solow concludes his model thus: when production takes place under the usual neo-classical conditions of variable proportions and constant returns to scale, no simple opposition between natural and warranted rates of growth is possible. The system can adjust to any given rate growth of labour force, and eventually approach a state of steady proportional expansion. A Critical Appraisal Solow is a pionner in constructing a neo-classical model where he retains the main features of Harrod-Domar model like homogenous capital, a proportional saving function and a given growth rate in labour force. Unlike Harrod-Domar model is like demonstrates steady-state growth paths. The Model of Technical Changes Harrod-Domar analysis is based on assumption of fixed coefficient in production and thus give rise to famous knife-edge problem. Neutral and Non-Neutral Technical Change Hiks Neutrality An invention is said to be neutral when it raises the marginal productivities of labour and capital in same proposition. A technical change is neutral if ratio of marginal product of capital to that of labour remains unchanged at a constant capital labour ratio. A technical change is termed as labour saving if it raises the marginal product of capital ralative to that of labour at a constant capital-labour ratio. Harrod Neutrality It given by Harrod has become crucial in growth literature. According Harrod, technical change is neutral if at a constant rate of interest the capital output ratio remains constant. A labour saving technical change raises the capital output ratio while a capital saving technical change lowers the capital output ratio at a constant rate of interest. The Models of Technical Change Disembodied Technical Change It is purely organisational which permits more output to be produced from unchanged inputs without any new investment. It refers to any kind of shift in production function that leaves the balance between capital and labour undistributed in long run. Its Criticism Denison, Kendrick, Griliches, and other tried to quantity and break down the residual into further components. They contended that the residual was not a catch all and that in economies scale and advances in knowledge rather than the result of technical change, assuming a stable prodcution function. Embodied Technical Change Solow modified the residual approach based on disembodied technical change in which capital stock is regarded as homogenous and technical change floats down from outside. Technical progress is embodied in new machines. Machines built at differents dates are qualitatively dissimilar and cannot in general case be aggregated into single measure. Assumption Capital stock consist of machines of different vintages New machines are more prodcutive than machines of older vintage Technical change proceeds at some given proportional rate Technical change affects only new machines All technical progress is uniform Machines embody all the latest knowledge at time construction Only gross investment in new machines is considered in model Production is linear homogenous of Cobb-Douglas type Its Appraisal The model of disembodied technical change is one of ex ante and ex post substitutability or a putty-putty model. Certain limitations of embodies approach to technical change: It fails to consider the influence of wage expectations on machines construction. The model is based on assumption of perfect competition and hence it fails to consider factor market imperfections. The solow model assumes that machines depreciate exponentially. The entire model is based on hypotesis that machines are of different types and new machines are better than old machines. Another assumption on which this model is based relates to fixed labour requirements. This model concentrate only on technological progress as embodied in new machines and ignores the problem of inducing innovations.