The echoes of the word “economic development” have reverberated through my ears since childhood. My mother is an economics Professor, and for nearly 3 decades, has taught the subject at a public university in Lahore.
At first glance, the name is fairly simple and quite literal. Economic development is the study of the way countries, states and nations develop their economies over time. What constitutes this development, how it is measured and what the economically developed countries have done better than the transitional or underdeveloped ones are all questions I grew up around.
A closer, more critical view into history reveals that the idea of ‘development economics’ proliferated into mainstream political discourse right after the second World War ended. WWII had left the European combatant states in social, institutional and infrastructural disarray. While globally recognized as economically developed states, these countries lacked the GDP statistics to qualify as countries with healthy economies. Hence in the 1940s, the usage of the two terms “economic growth” and “economic development” interchangeably permanently scarred developmental economics.
Economic growth is solely based on quantitative analysis of the GDP of the country. Economic development however, is meant to amalgamate this quantitative analysis with qualitative context into the state of the country’s institutions, the technological landscape and the overall well-being of the population.
As economic growth became the primary quantitative method to calculate economic development, the applicability of the development theories of the 1940s in third world countries was significantly hindered. Under the ambit of the ‘Big Push’ policies came the policy of import substitution industrialization, a theory that pioneered protectionist policies through high trade tariffs and import taxes to help local industries grow and develop without much external competition. The policy, applied in Latin American countries, proved to be a disaster. Political corruption and incompetence in emerging democracies, the lack of information about the potential of the industries in attaining a significant comparative advantage, and the lack of local investment leading to unstructured foreign lending, all pushed the countries that tried import substitution into extreme wealth inequality, increased political unrest and crushing foreign debt.
The rise of the Big Push theory post-WW2 was a generalized attempt to bring underdeveloped countries up to speed by injecting large sums of investment into industries, forming a technologically interdependent network of manufacturing industries that could help countries benefit from the positive externalities of industrial growth, and embark on a continuous path towards economic growth. The problem was the objective behind these theories was to transform postcolonial, poor countries into a caricature of developed countries. These theories failed to factor in the unique aspects of these third world states’ social systems, government and the nature of their economy.
The vast majority of economists and politicians who have influenced, altered and developed economic studies are from the West. Their ideologies, by virtue of not having any primary experience or knowledge about third world countries, are molded to work and align with the social values and institutions of developed countries.
While Latin American countries and even India zealously made this the forefront of their foreign policy during the 1950’s, it forced them into taking on huge international loans to form infant industries that hardly had any economic benefits. Provoking inflation, balance of payment issues, foreign debt crises, exasperating government corruption and bureaucratic red taping, causing civil unrest and expediating authoritarian regimes, the Big Push movement only had deleterious effects for these economies.
The overextended obsession with equilibrium is one that runs throughout the history of economic studies. The intellectual discourse in the discipline almost pins down equilibrium to be the main endpoint of economics itself. Intuitively, it has always seemed to me that the purpose of learning, studying and understanding economics should be to understand wealth accumulation patterns and fix entrenched inequalities. Why then has the point of economics become attaining equilibrium?
One can point to the Formalist Revolution of the 1950, one that completely transformed mainstream economic ideas. Arrow and Debrue’s 1954 essay included aggressively rigorous analysis that connected economic ideas with mathematical concepts of ‘game theory’, ‘convex analysis’ and the ‘fixed point theorem.’ The issue, as they acknowledge themselves, is that the main conditions needed for such models to be synonymous with real world situations require strict restrictions i.e. perfect information about prices, no frictions, no public goods, consistent preferences of every individual, and completely competitive markets. This makes such analysis and models almost redundant, ones that can be appreciated for their pure mathematical simplicity and precision, but can hardly be a tool for making economic policies.
Some economists like Karl Marx or Joseph Schumpeter would argue, and rightly so, that dynamic factors like innovation and individual preferences are ones that need to be considered endogenous to a market. They believe change and unanticipated effects of technology make it mandatory that dynamic analysis is used when it comes to mathematically explaining markets.
History shows that the normal state of a market economy is not equilibrium, but rather disequilibrium. Joan Robinson explained how the simple factor of time proves the theory of the equilibrium contradictory. Innovation builds on innovation. The market economy is founded on the principle of exponential accumulation of capital, technology and innovation. If these factors are considered endogenous inputs in the production function, the static mathematical explanations render themselves rather useless.
Why then have such redundant, incongruent and impractical models of economic markets still received such renowned success and credibility in mainstream economic theory?
Perhaps because it satiates the desire for economists to be taken seriously. It comes from an intrinsic need to have mathematical grounding in the discipline, to give it credibility as a quantitative social science. To be able to explain the chaotic, unpredictable elements of our economic lives and pin it to some simple mathematical equation that lies at the core of everything. Rather counterproductively, this maths envy has deeply impacted the way economic studies have developed as an interdisciplinary subject, with the main focus being centered on connecting it with mathematics and physics rather than humanities subjects like history, psychology and sociology.
For us to understand why economic methodologies and epistemology have such glaring issues is to really understand who controls and wields power over the economic ideologies that are widely accepted.
Economics as a discipline needs to be taught as a more flexible humanities subject, one that connects the psychology of the individuals participating in the market, and analyses multiple incentives that drive firms and connects it to historical analysis to make educated guesses and predictions about the future.
The neoclassical teaching of economics that plagues most economics classrooms in the world has hindered our ability to recognize economics for its actual strengths. As an A level student, I initially opted for the subject because of my specialized interest, one that I was hoping would allow me to cultivate a sophisticated understanding of economic phenomenon. To my dismay, the curriculum breakdown and the textbooks introduced my peers and I to an orthodox and sheltered economic teaching. The first leg of the curriculum introduces the foundational topics of supply and demand, the price elasticities and the way different market types function. The other leg then explains different types of state intervention policies that can be deployed if the “invisible hand” of the market is not sufficient. This disparate structure, where one chapter praises the market for its self-correcting mechanisms, while the other highlights state intervention policies, leaves students unclear on how to think about the market. The fact that the textbooks are designed to teach the neoclassical school of thought as objective truth instead of explaining the varying economic perspectives leaves students blindsided for when they have to specialize in the subject or pursue it professionally.
The surface level use of mathematical graphs and equations to explain market structures, one that do not properly explain the myriad complexities that exist in such mathematical models increase most students’ frustration towards the logical inconsistencies of the subject. As a student who deeply enjoys mathematical reasoning, it was aggravating to learn that the gradient of the supply and demand curves don’t really represent anything.
The focus and attempt to find mathematical order and strict objective outcomes has diminished the credibility of economics as a social science, as it almost always fails to properly explain tangible, on-ground economic ideas and phenomenon. The spending power of the United States during 2007 had inflated to an all-time high, superficially indicating economic stability and growth. The truth was what followed afterwards with the financial crash. Explaining economic conditions using quantitative facts and historical figures bind us to illusions, and hinder our ability to properly anticipate future trends.
Economics as a discipline needs to be taught as a more flexible humanities subject, one that connects the psychology of the individuals participating in the market, and analyses multiple incentives that drive firms and connects it to historical analysis to make educated guesses and predictions about the future.
In the 18th century, Thomas Malthus argued that the human race will starve itself to death, as we reproduce exponentially and the resources to support the human race are running out. What he couldn’t factor in was the endogenous effects of technology, agriculture mechanization and new innovative growing methods. His ideologies affected the way economics was seen in society, labelled a dismal science that constantly anticipated the doom of human life. Fortunately for us though, Malthusian theories proved untrue as society progressed forward. But it also proves that we cannot make theories and predictions based within the comforts of factors we can control and anticipate.
We need more targeted research approaches in the discipline that transform neoclassical methodologies to more flexible, practical and long term theories and axioms that we can reliably depend upon as learners and practitioners.