Theories of Economic Development

Development and
Sustainability
Theories of economic development
Vitor Vieira Vasconcelos
Thais Tartalha do Nascimento Lombardi
São Bernardo do Campo - SP
October, 2021

Content
 David Ricardo
 Joseph Schumpeter
 Walt Rostow
 CEPAL
 Albert Hirschman

Sociological theories of development
 Max Weber
• Development as rationalization of social action
• Eficient use of time and resources
 Nolbert Elias
• Control of individual biological impulses, redirecting to
socially acceptable activities
• Development of “civilized morals”
Weber, Max. "Wirtschaft und Gesellschaft (Economics and Society)." Tübingen: Mohr (1922).
Elias, Norbert. Über den Prozeß der Zivilisation (The civilizatory process). Bände in Kassette.
Frankfurt a. M: Suhrkamp Verlag, 1976.

David Ricardo (1772-1823)
Investments Job offer
increases
Full employment
economy
Salaries
increase
Population
growth
Food demand
increases
Agricultural
expansion to
less fertile lands
Increased food
prices
Salaries
increase
Profit
decreases
Innovations
increase
productivity
Exhaustion of
innovation
possibilities
Stationary state
Ricardo, David. On the Principles of Political Economy and Taxation. London: John
Murray, 1821. Third edition. First published: 1817.

Reflection
Based on the history of the
19th, 20th and 21th centuries,
into what extent David Ricardo's
concerns and predictions remain
valid today?

Joseph Aloïs Schumpeter
(1883-1950)

Joseph Schumpeter
 The core of Capitalism is not how
it manages the existing structures
 Creative destruction:
• Constant renovation of social
structures, production and products
SCHUMPETER, J. Capitalism, Socialism and Democracy. New York:
Harper & Row, 1942

Concept of Creative Destruction
 Based on Karl Marx’s theory
• Capitalism destroys previous structures to create its new
structure
 First used by Werner Sombart (sociologist)
 Conceptualization, theorization and popularization by
Joseph Schumpeter
 Differentiation
Marx: creative destruction would also
destroy Capitalism
Schumpeter: creative destruction brings
the possibility of unlimited development
for Capitalism
Harvey, D. (2010). The Enigma of Capital and the Crises of Capitalism. London: Profile Books. p. 46.

Circular model
(Classical Economics)
Firms
Families
Products
Payment
Labour
Salary
Enterpreneur
Capitalist
Idea
Success
Failure
Innovation
Extra profit
Immitation by
other
enterpreneurs
Profit
generalization
Difusion

Circular Economy
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Supply
and
demand
Price
Oferta Demanda
Momentary imbalance
Schumpeter, Joseph A. Theory of economic development. [1934] Routledge, 2017
Supply Demand

0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Supply
and
demand
Price
Oferta Demanda
Return to balance
Circular Economy
Supply Demand

0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Supply
and
demand
Price
Oferta Demanda
Change in Consumer Needs
Circular Economy
Supply Demand

0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Supply
and
demand
Price
Oferta Demanda
Return to balance (adptation to social changes)
Circular Economy
Supply Demand

0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Supply
and
demand
Price
Oferta Demanda
Innovation in Production
Economic Development
Supply Demand

0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Supply
and
demand
Price
Oferta Demanda
Return to balance (Economic Development)
Economic Development
Supply Demand

Schumpeter
 Types of economic innovation:
• New good (or with new characteristics)
• New production method
• New market
• New source of raw materials or semi-
manufactured goods
• New organization (monopolization or
fragmentation)
 Role of credit stimulating productive
innovations in capitalism

Schumpeter
 Enterpreneurs
• Responsible for implementing productive
innovations
• Social role
oBased on personal characteristics:
initiative and leadership
oIt is not a social class
oCan only be exercised for a certain period

Schumpeter
 Enterpreneurs
• Need to convince banks to invest in the innovation
• Leave the comfort zone of established standards
(unconscious rationality)
• Intuition + Planning (counscious rationality)
• Reactions against productive innovation:
o Legal or political barriers
o Social (moral) condemnation
₋ Resistance of groups threatened by innovation
₋ Difficulty to achieve cooperation
₋ Consumers’ resistance

Schumpeter
 Enterpreneur’s psychology
• Non-hedonistic: work instead of leisure
and consumption of goods
• Ambition for social mobility
• Pleasure for creation, ingenuity and effort

Distinct focuses
 J. Schumpeter
• Great Innovation Development Cycles
 A.P. Usher
• Continuous accumulation of several small technical
advances, suddenly registered as a whole
USHER, A. A History of Mechanical Inventions, 2ª ed. Cambridge, Mass: Harvard University Press, 1954

Evolution of Capitalism
 Periods of crisis: larger companies acquire smaller ones
 Innovations start to require more and more capital
 Large corporations assume the role of capital and
innovation providers
• Replace the Entrepreneur + Capitalist duo
• Market corporatization
o reduction of possibilities for innovation
(steady state of Capitalism)
o corporations dominate regulatory institutions (governments)
SCHUMPETER, J. Capitalism, Socialism and Democracy. New York: Harper & Row, 1942

Strategies of large
automotive and fuel
companies to delay or
halt the development of
electric cars
https://youtu.be/k96tIRjxzw0
(trailer)
https://youtu.be/3fW4xYBXdGo
(full movie)

Post-capitalism
• Increased education would privilege a critical
view of corporatist capitalism
• Change of focus from material goods to
cultural goods
• Democratic choice of political representatives
contrary to the values of capitalism
• At the limit, it would approach Socialism
(Welfare State) but without a revolution
SCHUMPETER, J. Capitalism, Socialism and Democracy. New York: Harper & Row, 1942

Activity
Taking into account the trends
indicated by Schumpeter in 1942,
regarding the evolution of
capitalism, education and
consequent political changes,
discuss on its validity and/or
viability nowadays, after more
than 75 years have passed.

 Creation of development banks
 Ex: BID, BNDES
Criticism of Schumpeter's Theories
 Little focus on factors such as:
• Labor exploitation and social inequalities (Karl Marx)
• Role of Governments in the economy (John Keynes)
o Could the State be an inductor of innovations?
• Relationship between salary and demand
o For Schumpeter, the offer would create its own demand
o Simplified assumption of full employment
 How to deal with “less innovative” underdeveloped
countries?
Repercussions of Schumpeter's theories

Walt Whitman Rostow
 Geopolitical Context after World War II
 World Bank financing post-war devastated countries –
Marshall Plan
 Discourse that the development in Capitalism
was more advantageous than in Socialism
• Focus on underdeveloped countries
 Economic Theory in opposition to Marxism
RIBEIRO, Flávio Diniz. Walt Whitman Rostow e a problemática do desenvolvimento: ideologia,
política e ciência na Guerra Fria. Tese (Doutorado em História Social) USP, São Paulo, 2008.

 Development stages:
 Underdevelopment is a delayed stage in the historical
process of economic development and growth
 Underdeveloped countries would reach the level of
those developed by the same development model
Underdeveloped
country
International
loans
+
State
intervention
Industrialization
Developed
country
Modernization theory

Modernization Theory
The five stages of development:
ROSTOW, Walt Whitman. The Stages of Economic Growth: A Non-Communist Manifesto.
Cambridge: Cambridge, University Press, 1960
Development
level
Time
Traditional
societies
Pre-conditions
for the take-off
Take-off
March to
maturity
Mass
consumption age

The five stages of development
1. Traditional societies
 Few finantial resources
 Low technology
 Predominantly subsistence agriculture
 Incapacity to produce surpluses
 Incapacity to accumulate
ROSTOW, Walt Whitman. The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge:
Cambridge, University Press, 1960

2. Pre-conditions to the take-off
(transitional state)
Internal social
change
Pressure by
colonization
Labor
specialization
Technological
modernization
Change in social values,
politics and knowledge
Productivity
increases
First ventures
Expansion of internal and
external commerce

3. Take-off
 Removal of the ties (social values) that kept in
the previous state
 Migration of rural labor to the industrial
sector
 New political, institutional and social system
4. March to maturity
 Urban labor specialization
 Product diversification
 Substitution of imported goods

5. Mass consumption age
Per capita income
increases
Better income
distribution
Expansion of the domestic
consumer market

Workforce allocation
StageSector
Primary
(agriculture)
Secundary
(industry)
Terciary
(services)
Traditional
society
Predominant Very small Very small
Pre-conditions
to the take-off
Predominant Small Very small
The take-off Declining Growing fast Small
March to
maturity
Small Stable Growing fast
Mass
consumption
age
Very small Declining Predominant

Modernization Theory
The five stages of development:
Development
level
Time
Traditional
societies
Pre-conditions
to the take-off
The take-off
March to
maturity
Mass
consumption age
UK 1750
USA 1800
Japan 1880
UK 1820
USA 1850
Japan 1900
UK 1850
USA 1920
Japan 1930
UK 1940
USA 1930
Japan 1950

What could be the
criticisms, limitations and
reservations to Rostow’s
Modernization theory?

CEPAL
(Comissão Econômica para a América Latina e Caribe)
 Why Rostow’s strategy of stages of development
did not turn Latin American countries into
developed countries?
 Development in Latin America has increased
internal social inequalities
 Underdevelopment is not a stage for development
 Underdevelopment is the result of unequal
relations between central and peripheral
countries (Dependence theory)
BIELSCHOWSKY, Ricardo. Cinquenta anos de pensamento na CEPAL: uma resenha. In: ______ (Org.).
Cinquenta anos de pensamento na CEPAL. Rio de Janeiro: Record, 2000. p. 13-68.

Raúl Frederico Prébisch
(1901-1986)

Raúl Frederico Prébisch
 David Ricardo's Law of Comparative Advantages
• Trade liberalization between countries would bring benefits to all
 Criticism due to unequal relations between countries
• Central countries would benefit more than peripheral countries
Central countries
Peripheral
countries
Investment
Debt
payment
High
added
value
goods
Low
added
value
goods
Positive balance
of payments
Negative balance
of payments
Prebisch, R., & Cabañas, G. M. (1949). El desarrollo económico de la América Latina y
algunos de sus principales problemas. El trimestre económico, 16(63 (3), 347-431.

https://mises.org/library/more-evidence-global-economic-inequality-decreasing
Inequality in the world (Gini Index)
Gini

Yanofsk, D. For the First Time, the combined GDP of poor nations is greater than the Rich
ones. Quartz. 2013.
GDP per capita (purchasing power parity)
Advanced economies
Developing and emerging economies

OXFAM (2015) Wealth: Having It All and Wanting More.
http://www.oxfam.org/sites/www.oxfam.org/files/file_attachments/ib-wealth-having-all-wanting-more-190115-en.pdf
Share
in
global
wealth
(%)
Richest 1%
Poorest 99%

OXFAM (2015) Wealth: Having It All and Wanting More
Wealth of the poorest 50%
Wealth of the 62 richest persons
Total wealth in billion dollars

Credit Suisse Research Institute, Global Wealth Report 2015, October 2015

Celso Furtado
 Developed countries
Technological
development
Capital
accumulation
Change in
demand profile
 Underdeveloped countries
Technological
development
Capital
accumulation
Change in
demand profile
FURTADO, Celso. Um Projeto para o Brasil, 4.a ed., Rio de Janeiro, Saga, 1968

Celso Furtado
 Developed countries:
• Profit largely reinvested in production
 Underdeveloped countries:
• Industrial elite uses profit to consume superfluous goods
imported from developed countries
• Money returns to developed countries by imported goods
• Little money left for reinvestment
• Elite control of the State maintains the dependency structure
Furtado, C., 1974. O mito do desenvolvimento econômico. Ed. Paz Terra

(Walt Rostow)
Dependence theory
(CEPAL)
Development problem: initial
stage of non-development
Development problem:
international explotation led to
developed and underdeveloped
countries
Development would help
traditional communities to reach
the developed countries
Development of central
countries causes
underdevelopment of peripheral
countries
(Walt Rostow)
Dependence theory
(CEPAL)
countries
countries causes
countries
Elites help in the diffusion of
new values, knowledge and
technology
Elites reinforce explotation and
inequality within and between
countries
Global economy divided
between modern and traditional
societies
Global economy divided
between industrial center and
peripheral agricultural countries
(Walt Rostow)
Dependence theory
(CEPAL)
countries
countries causes
countries
Elites help in the diffusion of
new values, knowledge and
technology
Elites reinforce explotation and
inequality within and between
countries
(Walt Rostow)
Dependence theory
(CEPAL)
countries

Albert Otto Hirschman
(1915-2012)

Albert Hirschman
 There is no single development recipe
• Different social contexts define different
development trajectories
 Development must be sequential
• You can't make a revolution that changes all
social values at once
HIRSCHMAN, Albert Otto. The rise and decline of development economics. In: Essays in Trespassing
Economics to Politics and Beyond. Cambridge University Press. 1981.
PINTO, Aníbal. Albert Otto Hirschman. Journeys toward progress. Studies of economic policy making in
Latin America. El Trimestre Económico, México, v. 31, n. 1, p. 166-168, 1964

Albert Hirschman
 Recognizes that there are unequal
relationships between center and
periphery
 But for a peripheral country, it is better
to have little development (growth
financed before indebtedness) than no
development at all
HIRSCHMAN, Albert Otto. The rise and decline of development economics. In: Essays in Trespassing
Economics to Politics and Beyond. Cambridge University Press. 1981.

Source: Pew Research Center analysis of data from World Bank PovcalNet database
(Center for Global Development version available on the Harvard Dataverse Network)
and the Luxembourg Income Study Database, August 2015

https://ourworldindata.org/uploads/2013/11/4-World-Income-Distribution-2003-to-2035-growth-rates.png
Global distribution of income in 2003, 2013, and projection for 2035
Income adjusted by purchasing power parity across countries and over time

Albert Hirschman
 Balanced growth strategy:
• Development policy should ideally be balanced between the
different segments of the economy
• Model used by the Marshall Plan in Post-War Europe
 Underdeveloped countries:
• Few resources
• Governments with limited operational structure
• Better to invest in more promising segments and count on the
economic chain effect
BIANCHI, Ana Maria. Albert Hirschman na América Latina e sua trilogia sobre desenvolvimento econômico.
Economia e Sociedade, Campinas, v. 16, n. 2, p. 131-150, ago. 2007.
HIRSCHMAN, Albert Otto. 1958. The Strategy of Economic Development. New Haven, Conn.: Yale University Press.

Albert Hirschman
 Economic development creates social
inequality
 State is responsible for managing
imbalances
• Development policies: increase inequality
• Social policies: socialize development
HIRSCHMAN, Albert Otto. 1958. The Strategy of Economic Development. New Haven, Conn.: Yale University Press.
HIRSCHMAN, Albert Otto. The rise and decline of development economics. In: Essays in Trespassing Economics to
Politics and Beyond. Cambridge University Press. 1981.

Albert Hirschman Tunnel Metaphor
General development level
Hirschman, Albert O., Rothschild, Michael. "The changing tolerance for income inequality in the course of
economic development." The Quarterly Journal of Economics 87, no. 4 (1973): 544-566.

Albert Hirschman Tunnel Metaphor
Tunnel
Advanced
development level
Hirschman, Albert O., Rothschild, Michael. "The changing tolerance for income inequality in the course of
economic development." The Quarterly Journal of Economics 87, no. 4 (1973): 544-566.
General development level

Activity
Would it be possible for Brazil to reduce
inequality in relation to the
socioeconomic level of developed
countries, while reducing its internal
socioeconomic inequality?
What could be done to achieve this
goal?

Questions?
Comments?
Thank you!
Vitor Vieira Vasconcelos
vitor.v.v@gmail.com

Theories of Economic Development

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