1. Classical development theory argued that economic growth would decrease or end due to increasing population and limited resources, leading to a stationary state. 2. Adam Smith's model saw wealth as total output and growth increasing through specialization of labor and capital accumulation, creating a virtuous cycle. However, competition for labor would eventually limit growth. 3. Ricardo saw economic growth from capital accumulation driven by profits, but diminishing returns on land would cause profits and then growth to fall to a stationary state. 4. Marx argued that surplus value appropriated by capitalists through unpaid labor would drive accumulation but would ultimately lead to overproduction and the downfall of capitalism.

1. Theories of
Economic
Developme
nt

2. What`s classical development theory ?
• The basic theme of the classical model was the development of
the economy from a progressive state into a stationary state.
• The classical growth theory argues that economic growth will
decrease or end because of an increasing population and limited
resources. Classical growth theory economists believed that
temporary increases in real GDP per person would cause a
population explosion that would consequently decrease real
GDP.
• The classical theory is basically a synthesis of the doctrines put
forward by Adam Smith, T. R. Malthus, David Ricardo, J. S Mill
and others.

3. Adam Smith’s model of growth
•Smith considered to be Father of Economics.
•His book: An Inquiry into Nature and Causes
of the Wealth of Nations. (1776)
• He wanted to examine:
•Why some countries are richer and some poorer?
•What are the basic economic factors that can
increase the wealth of an economy?
• Wealth of a country is not gold as assumed by
Merchantalists. Or agriculture as assumed by
Physiocrats.

4. According to Adam Smith:
•Wealth of an economy is the Value of its Total
Output – includes industrial and agricultural output.
•Growth increaseswealth by increasingtotal
output, income and wealth, and standard of
living.
•How can growth increase?
- If inputs increase, output will also increase.
- Three factors (inputs) – land, labour and capital –
owned by landlords, workers and capitalists.

5. Specialisation of Labour
• Labour specialisation increases output, by increasing
productivity of labour.
• This leads to increasing returns to scale.
So reinforcing.
• Labour specialisation increases output
because:
Skill increases with repetition
Time is saved,
The worker can innovate and improve his
performance.
Growth is
self-
• But increase in labour specialisation depends on demand
(Market) for the product. So Adam Smith states:
“Division of labour must always be limited by the extent
of the market.”

6. Capital Accumulation
•Capital accumulation is crucial for
economic growth.
•As capital increases, capital per man (K/L)
also increases, leading to increase in labour
productivity, and growth.
•Investment capital formation
• Only capitalist class invests.
•Workers receive subsistence wages, cannot save,
•Landlords only consume, not save

7. The Virtuous Cycle
Capital accumulation increases K/L
Higher productivity of labour with
higher K/L
Higher productivity leads to
higher incomes,
Higher income leads to increased
demand and bigger markets,
Leads to specialisation of labour, with
more division of labour.
But more division of labour leads on to
higher productivity

8. Stationary
State
Although there are increasing returns to labour
specialisation, growth cannot go on forever.
This is
because:
1.
Competiti
on
increases
for labour increases, as K
accumulation
2. Employment increases, and total wage payment
increases
3. Profits decrease, investment falls, and growth levels
fall.

9. Ricardian theory of
growth
Like Smith, David Ricardo also presented his
views on economic development in an
unsystematic manner in his book The
Principles of Political Economy and
Taxation. This book was published in 1917. It
was its third edition of 1921 and Ricardo’s
correspondence with a number of economists
that contain his ideas on which his

10. • In the Ricardian system whole economy is assumed to be a big
farm fixed in supply used to produce one output corn and output
is distributed between landlords, capitalist and workers in form of
rent , wages and profit .
• First rent is given its shares and residual is distributed between
profit and wages while interest is included in profits.
• Process of capital accumulation- capital accumulation is outcome
of profits because profits lead to saving which leads to capital. So
long as rate of profit is positive capital accumulation will
continue. Capital accumulation depends on capacity to save or
will to save . In reality profits depends on wages on price of corn
and price on productivity of marginal land. If there is more corn
prices will fall and so does the wage and profits will rise and
more capital accumulates.

11. Model of Growth
• Economic growth takes place due to capital accumulation.
• Capital accumulation is by capitalists, through investment,
• Investment comes from profits,
• As growth takes place, demand for food increases, and
intensive and extensive margins of land increases
• Total rents and wages increases.
• This squeezes out profits, which eventually falls to zero.
• This point is called the “Stationary State”.
• In Industrial sector also: – Rate of profit is same in
industry and agriculture, – Corn is paid as wages. – With
growth, labour input increases, total wages increase, – Profits
fall, investment falls and also rate of capital accumulation.

12. stationary
state
According to Ricardo, there is a natural
tendency for the profit rate to fall in the
economy so that the country ultimately
reaches the stationary state. When capital
accumulation rises with increase in profits,
total output increases which raises the wages
fund. With the increase in the wages
fund, population increases which raises the
demand for corn and its price. As population
increases, inferior grade lands are cultivated
to meet the increasing demand for corn.
Rents on the superior grades of land rise and
absorb a greater share of the output produced
on these lands. This reduces the share of
capitalists and labourers. Profits decline and
wages tend to fall to the subsistence level. This
process of rising rents and declining profits

13. Marxian theory of economic
development
•Karl Marx (1818 – 1883)
• A German philosopher,
economist, historian, political
theorist, sociologist, journalist and
revolutionary socialist.
•Father of Scientific Socialism
•Epitomized as ‘Marx the
Prophet’ and is ranked with Christ
and Mohammed if we are to judge
him by the number of his followers

14. Marxian Theory of Economic
Development
Gravest and the most penetrating examination of the
process of capitalist development
Major assumptions:
• 1. There are two principal classes in the society
•a. Bourgeoisie
•b. Proletariat
• 2. Wages of the workers are determined at subsistence
level of living.
• 3. Labour is the main source of value generation.

15. •4. Factors of production are owned by the
capitalist.
•5. Capitalist exploit the workers.
•6. Labour is homogenous and perfectly mobile.
•7. National Income is distributed in terms of
wages and profit.
• Marx contributed the theory in 3 respects:
• a. economic interpretation of history
• b. motivating forces of capitalist development
• c. alternative path of planned economic development

17. Surplus
Value
• Economic basis of the class struggle under capitalism
• Class struggle is simply the outcome of accumulation of surplus
value in the hands of few capitalists.
• Labour is the sole source of value in a commodity
• Capitalism is divided into two groups:
• 1. the workers who sell their labour power;
• 2. the capitalist who own the means of production
• Marx calls the unpaid labour as surplus value
• The net output of the economy is given as
• The total value of product (w) = constant capital (c) + variable capital (v) + surplus
value (s )
• W=(c + v) + s.

18. • Capital Accumulation
• Surplus value leads to capital accumulation
• The capitalist is always try to increase their profit in 3
ways
• 1.By increasing working hours to produce
labour’s
• 2.By diminishing no. of hours
required subsistence
• 3.Increasing the productivity of labour
• “Capital is dead labour, which , vampire like, lives
only by sucking living labour and lives the more, the
more labour it sucks”- Karl Marx

19. •Downfall of capitalism
• Replaces the workers by
machines which leads to the
reduction in surplus value
• Industrial reserved army is created
• Poverty and limited purchasing
power
• Over production of commodities
• Dump their products in market
which results in the fall of
market price and leads to a ‘sharp
decline of profit’

20. Schumpeter theory of economic
development
Joseph Alois Schumpeter first
presented his theory of economic
growth in Theory of Economic
Development published in German in
1911 (its English edition appeared in
1934) which was elaborated and
refined but in no way altered in any
essential respect in his Business Cycles
(1939) and Capitalism, Socialism and
Democracy (1942).

21. Schumpeter’s Model of Economic
Development
• Schumpeter assumes a perfectly competitive economy which
is in stationary equilibrium. In such a stationary state ,there
is perfect competitive equilibrium. no profits, no interest rates,
no savings, no investments and no involuntary unemployment.
This equilibrium is characterized by the term “circular flow”,
continues to repeat itself every year. In the circular flow, the same
products are produced every year in same manner.
• According to him economic development “is spontaneous
and discontinuous change in the channels of the circular flow,
disturbance of equilibrium, which forever alters and displaces
the equilibrium state previously existing”
• Development consists in the carrying out of new combinations for
which possibilities exist in the stationary state. New combinations
come about in the form of INNOVATIONS.

22. •INNOVATIONS
•An innovations may consist of:
•1.The introduction of a new product
•2.The introduction of new method of production
•3.The opening up of a new market 4.The conquest of
a new source of raw materials
•5.The carrying out of a new organization of any
industry like the creation of monopoly
•According to Schumpeter ,it is the introduction of
new product and the continual improvements in the
existing ones that lead to development.

24. • Schumpeter’s cyclical process of economic
development has been illustrated in the above
diagram where the secondary wave is superimposed
on the primary wave of innovation. In the prosperity
period, as the above figure reveals, the economic
development proceeds more rapidly due to over
optimism and speculation.
• The business cycle continues to fall below the level
of equilibrium with the beginning of the recession
and ultimately reaches the point of depression. In
the end, the retake of economic activities leads to
revival of the economy.
• In the Schumpeterian analysis of development
entrepreneurs have to play the central role in
business cycles. They initiate the economic
development in the spontaneous and discontinuous
manner. The cyclical swings are the cost of
economic development under capitalism.

25. The Decay of
Capitalism
• Schumpeter believed that the innovation carried out by the
entrepreneurs will not continue for long and will be turned into
routing activity through highly trained managers. This would reduce
the position of entrepreneur in a society and undermine their
functions and turn them into “warrior knight”.
• Another factor responsible for the downfall of capitalism is the weakening
of its institutional framework. The tendency towards concentration
and increase in the size of the production unit destroy
capitalistic institutions like private property and freedom of conflict.
• Finally, the destruction of the protecting political strata will give a big
blow to capitalist system. With the rise of capitalism not only the
institutional frame work will crumble but also the political strata
who would have protected capitalism at it’s early stage gets
destroyed. The very success of capitalism is destroyed by the royal
power. With the progress of capitalism the industrial units and

26. Leibenstein's Critical Minimum
Effort
• Harvey Leibenstein is of the view that
UDCs are characterized by vicious circle of
poverty (VCP) which keeps them around a
low income per capita equilibrium state. The
way out of this impasse is a certain 'Critical
minimum effort' which would raise the per capita
to a level at which sustained
development could be maintained.vicious circle
of poverty (VCP).
• In other words, a UDC will have to introduce
'Stimulus' in an amount which should be more
than a critical level for the sake of change.
• Leibenstein says that every economy is subject to
'Shocks and Stimulants'. A shock has the impact
of reducing the per capita income initially;

27. •Certain countries are poor and backward
because of the reason that the magnitude of
stimulant is small while that of shocks is large.
•On the other hand, if income raising forces are
more than income depressing forces the
economy will be having critical minimum effort
which will take the economy on the path of
development
• Shocks refer to those forces which reduce the level of output, income,
employment and investment etc. In other words, shocks dampen and
depress the development forces. Stocks depress development
forces which reverse the wheel of development.
• On the contrary, stimulants refer to those forces which raise the level
of income, output, employment and investment etc. In other words,
Stimulants impress and encourage development forces. They are called
‘Income Generating forces’ which lubricate the wheel of development.
Stimulants have the capacity to raise per capita income above

28. • The 45 ° line measures induced increases
and
decreases in income.
• P’ curve represents stimulants and Z’ curve
shows stocks.
• OM is the subsistence living standard.
• At M’ curve P’ Z’ intersect each other
indicating the equality between growth rate
of population and the growth rate of income
so that the income is caught in the vicious circle
of poverty.
• If the income level is raised from OB to OC
which is not in accordance with the critical
minimum effort, the rising population will
neutralize the increased income. The
system will once again hand on the
subsistence level of living. Shocks being
more powerful than the stimulants. At OJ
level of income raising forces are just FE
while the depressants up to GM. This will
bring the income level down to M again
which is just the subsistence level.
• Solution of this problem for such a rise in the

29. Balance-Unbalance
Growth
• A Balanced Economy
• Nurkse was concerned with the path of development
and the pattern of investment
• He argued that these should be of such a nature that
growth is balanced between different sectors
such that no bottlenecks or excess capacity arise
• Integral to this proposition is the notion that the
agricultural and industrial sectors must be balanced
• Unbalanced Growth
• Hirschman, Rostow, Fleming and Singer
propounded the theory of unbalanced growth as a
strategy of development to be used by the
underdeveloped countries. This theory stresses on
the need of investment in strategic sectors of the
economy instead of all the sectors simultaneously.
According to this theory the other sectors would
automatically develop themselves through what is known

30. Path Of Development
• Thi
s
figure demonstrates the path of
developmen
t,
using strategy of
unbalanced
growth. X-axis: Investment
cost
in
Sociall
y
Productive Activities Y- axis: Investment
Cost in Direct Productive Activities AA,
BB, CC curves: equi- productive curves
indicating various combinations of SOC,
DPA corresponding to given level of
national income HIGHER THE CURVE
GREATER THE LEVEL OF OUTPUT!!
• Growth process maybe explained by
making initial investments either to DPA
or SOC. It is because it is assumed that
in underdeveloped countries SOC or
DPA cannot be expanded
simultaneously. While the former is
called Development by Excess Capacity
of SOC, the latter is known as Shortage of