14.9. Economic Development in Action

Loans and other forms of assistance from these international agencies, independent businesses, and developed nations are typically used for some or all of the following activities:

• Modernizing the agricultural sector. Typically, agriculture in less-developed countries is the largest industry, but it is often inefficient. For that reason, many economists feel that the most effective way to improve living standards in devel­oping nations is to increase farm productivity by introducing more modern farming techniques, fer­tilizers, and equipment.

If, for example, a way could be found to expand farm output by 5 percent in Bangladesh, the workers and other resources formerly needed to feed the population could then devote their ener­gies to improving the quality of life in that coun­try. But the development of new industries in LDCs often requires much capital.

• Adding to the Physical Infrastructure. Phys­ical infrastructure refers to the facilities needed to provide basic services like transportation, commu­nication, sanitation, and power. Roads, bridges, and power plants are all part of a nation's physical infrastructure. If a nation's industry is to increase, the infrastructure necessary to support that growth must already be in place.

• Increasing Output and Foreign Trade.

Increasing output provides people with the goods and services needed to improve their living stand­ards. It also provides jobs and goods for export. Goods for export enable a country to engage in foreign trade, allowing it to obtain the things it cannot produce on its own.

• Improving Education and Training. Develop­ment involves people who can handle the jobs nec­essary to produce modern goods and services in today's offices and factories and on today's farms. People need to be able to read, write, compute, and operate machinery and equipment. Less-developed countries need to provide education and training for their people.

• Slowing Population Growth. For living stand­ards to improve, a country's economic growth must increase faster than its population. In other words, if a nation's output over a period of time increased by 10 percent, while its population increased by 15 percent, living standards would be worse at the end of the period than they were at its beginning. If, on the other hand, population increased by 10 percent at a time when output increased by 15 percent, living standards would, on the average, have improved.

For that reason, developing countries often try to combine their efforts to increase economic growth with campaigns to encourage people to limit the size of their families.

14.10. The ldCs: Why Should We Care about Them?

Most Americans are likely to say that the best rea­sons for helping poorer nations are humanitarian rather then economic or political. They would agree with the English poet, John Donne, who said:

Any man's death diminishes me because I am involved in Mankind; and therefore never send to know for whom the bell tolls; it tolls for three.

But there are several practical reasons the United States and most industrialized nations support the efforts of the developing nations. It's good politics and it's good business.

In the past, Western democracies used foreign aid for political reasons. They attempted to discourage countries from becoming communist. Today, econom­ic assistance is more commonly used to promote political stability or to

establish military bases in strategic locations.

But, it's also good business because the United States is part of a global economy. More than ever, the U.S. looks to other nations to provide the imports necessary to maintain living standards, and to purchase its exports. But poor nations make poor customers. They cannot afford to buy our goods and services. Aid will be good business if it enables those countries to increase their wealth and ability to pur­chase U.S. goods and services.

Summary

Socialism refers to an economic system in which property and the means of production are owned by the state, and resources are allocated according to a plan. The manner in which socialist societies solve their economic problems ranges from the very democratic, as in the case of Sweden, to the most totalitarian, as in the case of the former Soviet Union and China.

Socialist economies have two disadvantages when compared to capitalism:

• They are less sensitive to consumer demand; and

• Unlike market economies, where output reacts quickly to the forces of supply and demand, planned economies depend on long-range decisions that are not easily changed.

The Soviet Union stood as a model of authoritarian socialism, or communism. By contrast, Hungary, as it reforms, is a state in which a great deal of property is privately owned, and the laws of supply and demand affect the allocation of a substantial share of the nation's resources.

Sweden is a democratic nation that freely elected a socialist government to office. Public ownership of the means of production and central planning apply only to sectors of the economy that have been "nationalized."

Not only are there differences among socialist economies, there are varieties of capitalist nations as well. In Japan, the means of production are privately owned, but businesses tend to cooperate rather than compete. They have long-term goals aimed at strengthening individual businesses and increasing the market share controlled by Japanese companies in international trade.

Most of the people in less-developed countries (LDCs) have living standards that are significantly lower than those enjoyed by the people of the industrialized nations. LDCs lack adequate food; highways and transportation systems; an educated workforce; and especially the capital needed to invest in improved farm equipment, fertilizers, and pesticides-as well as roads, harbors, or factories.

Nevertheless, most economists look to economic growth as the best hope for the future of the LDCs. However, economic growth is impossible without substantial assistance from the industrialized nations and the international agencies such as the World Bank and the International Monetary Fund.

The History of Economic Thought

K arl Marx (1818-1883) Prophet of Socialism and Communism

For most of the 20th century, one-third of the world's popu­lation considered Karl Marx to be history's greatest econo­mist. Marx was born in Germany, but because of his revolutionary activities, he lived in exile from 1842 until his death in 1883.

In 1849, Marx moved to London, England, where he studied and wrote his greatest work, Das Kapital (Capital). Marx's dedication to his studies made it impossible for him to earn a living. He and his family lived in poverty. And without the finan­cial help of his friend Frederick Engels, a wealthy textile manufacturer from Manchester, they might have starved to death.

In 1845, the League of the Just (later named the Communist League) asked Marx and Engels to prepare a statement of beliefs. They wrote The Communist Manifesto. It contains some of the most memorable lines of revolutionary literature:

"... Let the ruling classes tremble at a Communistic revolution. The proletarians [workers] have nothing to lose but their chains. They have a world to win.

Working men of all countries unite!"

The Economic Theories of Karl Marx. Marx had much to say about the world in which he lived. The following paragraphs briefly describe some of his more important theories.

The economic interpretation of history. In Marx's view, the course of history has been determined almost solely by economic forces. Forget about great men and women, religion, and patriotism. Look instead, he said, at the economic events of the time to find the real reasons why people and nations behaved as they did.

He believed that history has been a series of strug­gles between economic classes. In Ancient Rome the land-owning aristocracy struggled for power with small farmers and city workers. In medieval times, guildmasters and journeymen, nobles and serfs struggled with one another for economic power. Similarly, the French Revolution could be explained in terms of a struggle between merchant classes and the aristocracy.

The exploitation of labor. According to Marx, goods and services had value because of the efforts of laborers. But according to the economic theory of the day, workers were only paid enough to enable them to stay alive. Whatever was left over (profits) was pocketed by the factory owner—the capitalist. Profits, therefore, represented surplus value that should belong to those who created it—workers.

The inevitability of capitalism's collapse. Under capitalism, Marx predicted the rich would get rich­er and the poor, poorer. Because workers were underpaid, they would be unable to buy the goods and services they produced. Eventually, the sys­tem's excesses would lead to the final class struggle. In this, workers would overthrow the capitalists who had been exploiting them. In the new order that would follow, Marx concluded, class struggle would no longer be necessary, and the state could simply "wither away." Each worker would perform "according to his ability" and be rewarded "accord­ing to his needs."

Most American economists today would disagree with Marx's views of the world. History cannot be explained in economic terms alone, labor is not the only source of value, and who would seriously pre­dict a time in which governments would "wither away"?

Thomas Robert Malthus (1766-1834) Prophet of the "Dismal Science"

In 1986 music lovers were treated to a day-long concert featuring many rock and jazz greats. The Live Aid concert staged simultaneously in London's Wembley Stadium and Washington's JFK Stadium was beamed to millions of viewers in Europe and America. The purpose of the concert was to raise funds for the starving people of Africa. The sight of the desperately hungry in Ethiopia a few years ago, and before that in the West African region of the Sahel, shocked and helped sensitize television viewers to the tragedy in these lands.

Some scholars place the major blame for these conditions on runaway population growth in LDCs. They explain that standards of living in many developing nations continue to decline because the population growth is greater than eco­nomic growth. If world economic growth continues to average about 2 percent annually, nearly half the world's people will live in countries where pop­ulation growth exceeds economic growth.

Much of what these writers were saying repeated the warnings of an 18th-century English econo­mist, Thomas Malthus, in his Essay on Population (1798). His argument was direct and simple. Food supplies can be increased through the addition of land and labor. Consequently, growth in food pro­duction will follow an arithmetic progression (2,4, 6, 8, 10 and so on). But population growth expands geometrically (2,4, 8, 16, 32, 64 and so on).

Due to the difference between the rate of popula­tion growth and food production, Malthus conclud­ed that a large portion of humanity was doomed to a life of misery. As arithmetically increasing food production fell short of feeding the geometrically increasing population, malnutrition and disease would take their toll until the rising death rate restored the balance between food and population.

Other than urging the poor to have fewer children, there was nothing that society could do to reduce starvation or suffering, Malthus thought. For that reason, he opposed legislation to provide relief and housing for those living in poverty. In his view, such aid would simply encourage the poor to have more children and worsen their lot. It is little won­der that after reading the Essay on Population, Thomas Carlyle, a contemporary British writer, called economics the "dismal [depressing] science."

Since Malthus's day several factors have prevented the fulfillment of his prophecies. The most visible of these has been the enormous increase in food production, on the one hand, and declining birthrates in the industrialized nations on the other. Food production increased far beyond any­thing he could have foreseen, owing to scientific and technical advances in farming. Meanwhile, declining birthrates have brought several European countries near zero population growth.

Critics of Malthus argue that the focus on popula­tion ignores the main causes of hunger and starva­tion. The fact is that the world's farmers grow enough to feed the world. However, not enough food reaches those in need because poor nations do not have the international currency with which to purchase it from world suppliers.

Thomas Malthus, a controversial figure in his own time, remains one today. To some he was a great prophet whose theories are still relevant. To oth­ers, his opinions are as shortsighted and inappro­priate today as they were nearly 200 years ago.