16 September 2010

Development Economics

Q: What is economics?
A: Economics is the science of how man satisfies his wants. More formally, it is the science of how man produces goods and services, and distributes them.

This is the standard definition of economics. But is it correct?

Economics was born when Adam Smith wrote "The Wealth of Nations" in 1776. This coincided almost exactly with the beginning of the Industrial Revolution (1775–1850). The Industrial Revolution was the second great Revolution in human history, after the invention of agriculture in 10,000 BC. It marked the end of the Agricultural Age and the beginning of the Industrial Age (Modern Age).

The science of economics developed as the Industrial Revolution progressed. The development of economics paralleled (kept pace with) the industrialisation of the West. This is an important point, so obvious that it is overlooked. Economics is a modern/industrial science; it is a science of the Modern/Industrial Age.

Thus economics is not merely the science of the production and distribution of goods and services. It is the science of how goods and services are produced and distributed in a modern/industrial economy.

What difference does it make?, you might ask. There are two differences:
1. Economics is built on certain assumptions that are true in an industrial economy – like perfect markets, perfect information, perfect competition. But these assumptions are not true in an agricultural economy.
2. Economics deals with industrial economies. It doesn't tell agricultural economies how to industrialise. In other words, economics analyses a steady state. It doesn't tell us how to attain that steady state.

This is classical or traditional economics – the stuff we study in any economics book.

Till World War 2 economists looked only at the industrialised parts of the world: Europe, USA, Japan. It was only after World War 2 that they started looking at the majority of the world that was still agricultural/industrialising. Thus was born a new branch of economics – development economics (or growth economics) – to:
1. Deal with agricultural economies, with their imperfect markets, imperfect information, imperfect competition (deviations from the assumptions of classical economics).
2. Tell us how agricultural economies can/should industrialise*.

Development economics is a vast and diverse field. It deals with topics as widespread as poverty, inequality, population growth, education, health, agriculture, industry, urbanisation, environment, etc. Thousands of papers are published every year in technical journal journals. But because the subject is so new, vast and diverse, there are very few books that give a comprehensive introduction to it.

The few good books are:
1. Economic Growth (2009) – David Weil
2. Economic Development (2003) – Todaro & Smith
3. Development Economics (1998) – Debraj Ray
(I recommend reading them in this order)

Robert Lucas, winner of the Nobel Prize for Economics in 1995, said about development economics:
"The consequences for human welfare involved in questions like these are staggering. Once you start thinking about them, it is very hard to think about anything else."
Amen.

*This is why growth/development economics is the nearest thing we have to a "science of industrialisation/modernisation".

1 comment:

callezee said...

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