1) What is the primary goal of modernization theory in contrast to theories of capital formation? Compare and contrast Hoselitz’ formulation of modernization theory with Lewis’ theory of capital formation
In the 18th century, during the Age of Enlightenment, an idea named the Idea of Progress emerged whereby its believers were thought of being capable of developing and changing their societies. This philosophy initially appeared through Marquis de Condorcet, who was involved in the origins of the theoretical approach whereby he claimed that technological advancements and economical changes can enable changes in moral and cultural values. He encouraged technological processes to help give people further control over their environments, arguing that technological progress would eventually spur social progress. In addition, Émile Durkheim developed the concept of functionalism in the sociological field, which emphasizes on the importance of interdependence between the different institutions of a society and their interaction in maintaining cultural and social unity. His most well known work, The Division of Labour in Society, which outlines how order in society could be controlled and managed and how primitive societies could make the transition to more economically advanced industrial societies.
Another reason for the emergence of the modernization theory derived from Adam Smith’s Wealth of Nations, which represented the widespread practical interest on economic development during a time when there was a constant relation between economic theory and economic policy that was considered necessary and obvious. It was by analysing, critiquing, and hence moving away from these assumptions and theories that the modernization theory began to establish itself. At the time the United States entered its era of globalism and a ‘can do’ attitude characterized its approach, as in the functionalist modernization advanced by B. Hoselitz: “You subtract the ideal typical features or indices of underdevelopment from those of development, and the remainder is your development program”. As he also presents in Social Structure and Economic Growth , this body of economic theory “abstracted from the immediate policy implications to which it was subject” and also “assumed human motivations and the social and cultural environment of economic activity as relatively rigid and unchanging givens”(23-24). He claims that the difference lies in the extra examination of what is beyond simply economics terms and adjustments, by “restructuring a social relations in general, or at least those social relations which are relevant to the performance of the productive and distributive tasks of the society”(26). Most forms of evolutionism conceived of development as being natural and endogenous, whereas modernization theory makes room for exogenous influences.
Its main aim is to attain some understanding of the functional interrelationship of economic and general social variables describing the transition from an economically “underdeveloped” to an “advanced” society. Modernization theory is usually referred to as a paradigm, but upon closer consideration turns out to be host to a wide variety of projects, some presumably along the lines of ‘endogenous change’ namely social differentiation, rationalization, the spread of universalism, achievement and specificity; while it has also been associated with projects of ‘exogenous change’: the spread of capitalism, industrialization through technological diffusion, westernization, nation building, state formation (as in postcolonial inheritor states). If occasionally this diversity within modernization is recognized, still the importance of exogenous influences is considered minor and secondary. I do not view ‘modernization’ as a single, unified, integrated theory in any strict sense of ‘theory’. It was an overarching perspective concerned with comparative issues of national development, which treated development as multidimensional and multicausal along various axes (economic, political, cultural), and which gave primacy to endogenous rather than exogenous factors. (Tiryakian, 1992: 78)
In the context of Cold War modernization theory operated as a highly interventionalist tool enabling the ‘free world’ to impose its rules and engage in ‘structural imperialism’. Typically this occurred in the name of the forces of endogenous change such as national building, the entrepreneurial spirit and achievement orientation. In effect modernization theory was a form of globalization that was presented as endogenous change. Modernization theory, therefore, emerged from these ideas in order to explain the process of modernization within societies. The theory examines not only the internal factors of a country but also how with the aid of technology and the reformation of certain cultural structures, “traditional” countries can develop in the same manner that more developed countries have. In this way, the theory attempts to identify the social variables, which contribute to social progress and the development of societies, and seeks to explain the process of social evolution.
The question of the functional relations between all or most culture traits is left open, and special attention is “given only to those aspects of social behaviour that have significance for economic action, particularly as this action relates to conditions affecting changes in the output of goods and services achieved by a society”(30). They conceptualize the process of development in a similar linear, evolutionary form as older evolutionary theories of progress, but seek to identify the critical factors that initiate and sustain the development process. These factors, they argue, are both intrinsic and extrinsic: the former involves the diffusion of modern technologies and ideas to the developing world, while the latter requires the creation of local conditions, such as the mobilization of capital, which will foster progress. Modernization theorists believe that primitive production, an anachronistic culture, and apathetic personal dispositions combine to maintain an archaic socioeconomic system that perpetuates low levels of living. Modernization theorists hold that policies designed to deal with these traditional impediments to progress primarily through economic intervention, provide the key to prosperity.
Overall, Hoselitz’s modernization theory is a sociological theory of economic growth that determines the mechanisms by which thesocial structure of an underdeveloped economy was modernized – that is, altered to take on the features of an economically advanced country. Hoselitz’s answer was based on the “theory of social deviance” – that is, that new things were started by people who were different from the norm. Unlike Lewis’ theories that we will revise later, Hoselitz thought that small-scale private economic development was the best way of achieving development in Third World economies. This particularly involved revaluing what he called “entrepreneurial performance”, something that Lewis also agrees with, but in a way that provided not only wealth but also social status and political influence. In Chapter 8 of Sociological Aspects of Economic Growth, Hoselitz focuses on the creation of “generative cities” (that is, cities producing innovations) rather than traditional rural areas were the focal points for the introduction of new ideas and social and economic practices. Many of the early colonial settlements in the New World and South Africa, Hoselitz claimed, were parasitic, enjoying a certain degree of economic growth “ within the city itself and its surrounding environs” only at the expense of the rest of the region, which was ruthlessly exploited for its natural and agricultural resources (p.280).
Although prescriptions for inducing social change and removing cultural obstacles to economic modernization in developing countries may be described as social policies, they do not seek to deal directly with mass poverty and its attendant problems of malnutrition, ill-health, inadequate housing, illiteracy, and destitution. These critical welfare concerns are seldom referred to by modernization theorists, namely by Hoselitz. Instead, the implicit assumption in his writings is that the process of economic development and social change will raise levels of living and remedy these problems automatically. Since economic growth, engendered by capital investments in modern industry, will expand employment, the proportion of the population in subsistent poverty will steadily decline. The increasing numbers of workers in the modern economy will experience a steady rise in real income that will be sufficient not only to satisfy their basic needs for food, clothing, and shelter but permit them to purchase consumer commodities as well as social goods such as medical care, education, and social security.
Arthur Lewis was one of the first economists to create a theory about how industrialized and economically stable countries are capable of helping undeveloped countries progress. He presented this theory in his work Economic Development with the Unlimited Supplies of Labor” where he brings about the concept of capital formation. He defines it as the transfer of savings from households and governments to business sectors, resulting in increased output and economic expansion. He claims that his “model says, in effect, that if unlimited supplies of labor are available at a constant real wage, and if any part of profits is reinvested in productive capacity, profits will grow continuously relatively to the national income, and capital formation will also grow relatively to the national income”(158). From here bridged off his development of the two-sector model of the economy and the theory of dualism. Both posit the existence of a substantial pool of underutilized labor in a backward, subsistent agricultural sector of an economy that perpetuates low levels of production and mass poverty.
This model comprises two distinct sectors, the capitalist and the subsistence sectors. The former, which may be private or state-owned, includes principally manufacturing industry and estate agriculture; the latter, mainly small-scale family agriculture and various other types of unorganized economic activity. Here the capital, income and wages per head, the proportion of income saved, and the rate of technological progress are all much higher in the capitalist sector. The subsistence sector is both at a very low level, and also stagnant, with negligible investment and technical progress and no new wants emerging. Institutional arrangements are the ones maintaining this chronic disequilibrium between the sectors, implicit in these differences in real income and productivity. In the extended family the members receive approximately the average product of the group even if the marginal product is much less. The process of development, initiated by an increase in the share of capitalists in the national income, I essentially the growth of the capitalist sector at the expense of the subsistence sector, with the goal of the ultimate absorption of the latter by the former. To some extent, this is similar to Hoselitz’s development of the modernization theory, whereby the claims that the formation of his generative cities (a) creates a new demand for industrial raw materials from the surrounding region, and (b) attracts new population to the cities, thereby increasing the demand for food from the countryside. The net effect of these forces is a “widening of economic development over an increasing area affecting a growing proportion of the population outside the city”(Hoselitz, 282).
However, Lewis’ theory has several limitations and conditions, most importantly that his theory can be applied only in countries with unlimited supplies of labor. Unlimited supplies of labor arise from the employment of more workers than is productively effective. Lewis went through all of the areas of Caribbean society where he thought there were pools of labour in which the marginal productivity was negative, negligible or zero. His plan now was to make this a potential, industrial labour force. He could take all of the labour away from agriculture, away from casual labour, without lowering the profit margins of the places where they are currently employed. This was not a radical, disruptive assault on the existing economic order, which resulted in one of the main reasons that his theory was so successful. Ineffective production, occurring when an additional worker prevented the previous one from producing another product (hence equaling a negative marginal productivity) was common in the Caribbean, Southeast Asia and other undeveloped regions of the world.
Several sectors of the economy employ too many people with negligible, zero or negative marginal productivity. According to Lewis these productively unnecessary individuals are employed in agriculture, or are casual workers, petty traders, or women of the household. He claims that the transfer of these people’s work from these areas towards commercial employment is one of the most notable features of economic development. The second source of labor for expanding industries is the increase in the population resulting from the excess of births over deaths. After his analysis of the effect of development on death rate, whereby he concludes that “[death rates] come down with development from around 40 to around 12 per thousand”(144), he claims therefore that “in any society where the death rate is around 40 per thousand, the effect of economic development will be to generate an increase in the supply of labor”(144). From this point of view, he states, “there can be in an over-populated economy an enormous expansion of new industries or new employment opportunities without any shortage of unskilled labor”(145), though too many people could again cause ineffective production. He clarifies this by saying, “Only so much labor should be used with capital as will reduce the marginal productivity of labor to zero”(145). This can be achieved by offering and maintaining decently high wages. The wages offered should be only slightly higher than the wages available in the subsistence sector, since wages that are too high may attract more workers than needed.
But firstly, and perhaps most importantly, entrepreneurial-minded capitalists are required in order to invest in the nation. Tax holidays attract the foreign capitalists. It is not a very difficult task, because they have very good incentives to come. The planter class in the Caribbean seemed just like the planter class in the American South – it had no desire to go industrial and no desire to go competitive. It was still trapped in a situation between an old monopoly system and a market situation since they were able to negotiate for a protected market for sugar, not a competitive market. Lewis then looked around realized the only way he could keep this program of industrialization launched would be by visiting England and America where capitalists and entrepreneurs were flourishing and foster their entrance into the Caribbean. Again, he employed the concept of a dual economy where a subsistence sector existed, but also from where he created from scratch this modern industrial sector to establish on modern capitalism. Capitalists in North America and Europe found these labouring conditions and costs in the Caribbean quite attractive. Getting this labour to the imported capitalists would not be resisted locally because he was taking those labourers with marginal productivity of zero. Once they began working, he would then re-invest more capital into the factory, so that it could expand, employ more workers, export more products, and increase profits, hence developing a self-feeding system that would eventually lead the national income to grow. Although Hoselitz also is of the belief that the formation of a dual economy is beneficial, rather than necessarily attract foreign capitalists through such incentives, Hoselitz believes that the creation of westernized cities led the way forward. He claims that cities modelled after the Western cities exhibited a spirit difference from the traditionalism of the countryside. In this way, he differs slightly from Lewis in that he favored a shift in political power away from traditional leaders and toward total control by economic and urban modernizers in underdeveloped countries, not necessarily foreign entrepreneurial capitalist as Lewis asserts.
Lewis knew that some products would work better than others, so he developed an Industrial Programming Market – a number of basic calculations about those particular commodities, if produced in the Caribbean, would be particularly competitive internationally. And so as a result of this study Lewis found that the production of airbrushes, gloves, furniture, needles, shirts, and leather goods would be particularly good to produce, given the skills of the labour force available at the time. For the self-feeding system to be a continuous process, costs of labour had to remain fairly constant. If the cost of labour rose too rapidly, they would not be sustained since the goods would no longer be internationally competitive. The key to this model is indeed international competitiveness. Capitalists can create more capital when the supply of money is higher, and hence if governments create credit, inflation arises yet does not have the same effect as the inflation that arises during depression periods. This inflation only has an effect on the prices in the short-run so that in the long run the final effect equal to what it would be if capital was formed by the reinvestment of profit. Lewis discusses at some length the methods by which governments of underdeveloped countries can raise revenue, especially the substantial funds required for government capital formation. For familiar political and administrative reasons much of this revenue has to be raised from indirect taxes, notably import and excise duties and export taxes. He argues that indirect taxation is more likely to increase than to decrease the supply of effort:
The taxpayer usually does not know how much tax is included in the prices of the articles he buys, so in so far as the disincentive effect of taxation is psychological it can be avoided by using indirect rather than direct taxes… If it is an increase in indirect taxation, the effect is probably to increase effort rather than to reduce it (414).
Because of the multiple restrictions in this model, it is designed for countries with unlimited supplies of labor and hence this growth has a limit: “The process must stop when capital accumulation has caught up with population, so there is no longer surplus labor”(172). Furthermore, if wages are too high, they may consume the entirety of the profit leading to no re-investment. Several other reasons for the end of capital formation vary; the occurrence of natural disasters, war or a change of political system can also prevent further economic expansion in a closed economy.
Lewis’ model is powerful but also highly restricted and specific to only a handful of nations. Some critics also claim that the distinction between the two sectors is too sharp; that small-scale agriculture is often far from stagnant and the emergence of the production of cash crops by individual producers has in fact been a key instrument in economic development since capital formation is actually created in this type of agriculture. Also, this model requires low wages for the labor force, yet very low wages result in a wide gap between the lower and upper class in a society, an issue that many have questioned thoroughly. Lewis says openly that exploitation can easily occur in this model, but that it is part of capital accumulation. He believes that one has to sacrifice a generation to grow the economy, because he assumed that if all goes well and more consumers are attracted to Caribbean, they will generate more business, and the economy will grow to the point where the wealth can be redistributed to the people. He reckoned that it would take, given the rate of growth that he observed in the Caribbean, one generation, thus a period between 40 and 50 years, to grow the economy and claim that poverty could be eradicated in this region. And yet the cost of this would be exploiting this generation, so that their children could benefit from it later.
Hoselitz, as stated earlier, applied the ideas of Parsons and other sociologists to an analysis of the development process under the assumption, drawn from Adam Smith, that increasing productivity was associated with more detailed social divisions of labor: A society on a low level of economic development is, therefore, one in which productivity is low because division of labor is little developed, in which the objectives of economic activity are more commonly the maintenance or strengthening of status relations, which social and geographical mobility is low, and in which the hard cake of custom determines the manner, and often the effects, of economic performance. An economically highly developed society, in contrast, is characterized by a complex division of social labor, a relatively open social structure from which caste barriers are absent and class barriers are surmountable, in which social roles and gains from economic activity are distributed essentially on the basis of achievement, and in which, therefore, innovation, the search for and exploitation of profitable market situations, and the ruthless pursuit of self-interest without regard to the welfare of others is fully sanctioned. (Hoselitz, 1960: 60).
These preceding theories both provide us with some preliminary indications and developments of views of modern social orders broader than that envisaged in the initial models provided. They stress the historical dimensions of the process of development, emphasizing that this process is not universal, something in the very nature of humanity or in the natural development of human societies. Instead, the modernization process is fully bound to a certain period in human history, even though in itself it is continuously developing and changing throughout this period. Development and the challenges it brings forward constitute a basic given for most contemporary societies. Though it certainly is pervasive in the contemporary setting, it is not necessarily irreversible in the future, and it would be wrong to assume that once these forces have impinged on any “society”, they naturally push toward a given, relatively fixed “end-plateau.” Rather, as we have seen, they evoke within different societies, in different situations, a variety of responses which depend on the broad sets of internal conditions of these societies, on the structure of the situation of change in which they are caught, and the very nature of the international system and relations, whether those of “dependency” or of international competition. Section 2
5) Briefly outline David Ricardo’s theory of comparative advantage; then outline in greater detail Samir Amin’s theory of periphery capitalism and why he thinks that trade between the central and peripheral capitalist economies does not meet the conditions of Ricardo’s theory
In 1817, David Ricardo, an English political economist, contributed theory of comparative advantage in his book ‘Principles of Political Economy and Taxation’. This theory of comparative advantage, also called comparative cost theory, is regarded as the classical theory of international trade. According to the classical theory of international trade, every country will produce their commodities for the production of which it is most suited in terms of its natural endowments climate quality of soil, means of transport,
capital, etc. It will produce these commodities in excess of its own requirement and will exchange the surplus with the imports of goods from other countries for the production of which it is not well suited or which it cannot produce at all. Thus all countries produce and export these commodities in which they have cost advantages and import those commodities in which they have cost disadvantages. Ricardo states that even if a nation had an absolute disadvantage in the production of both commodities with respect to the other nation, mutually advantageous trade could still take place. The less efficient nation should specialize in the production and export of the commodity in which its absolute disadvantage is less. This is the commodity in which the nation has a comparative advantage.
Ricardo takes into account the following assumptions: there are two countries and two commodities; there is a perfect competition both in commodity and factor market; cost of production is expressed in terms of labor; labor is the only factor of production other than natural resources; labor is homogeneous i.e. identical in efficiency, in a particular country; labor is perfectly mobile within a country but perfectly immobile between countries; there is free trade; production is subject to constant returns to scale; there is no technological change; trade between two countries takes place on barter system; full employment exists in both countries; there are no transport costs.
In 1973, Samir Amin, an Egyptian political economist, begins his dialogue in Unequal Development by referring to Marx’s writing on non-European societies, namely India and China, and creates a work in which he reevaluates Peter Evans’ theory of Dependent Development and simultaneously presents his theory of peripheral capitalism in developing societies. He shows how these early ideas established the notion of the centre and the periphery, and how “the development of capitalism in the periphery was to remain extraverted, based on the external market, and could therefore not lead to a full flowering of the capitalist mode of production in the periphery”(199). He then begins to develop his own theory of the transition to peripheral capitalist economy by questioning David Ricardo’s assumptions in his theory of comparative advantage, and later outlines nine theses to
support his views. Peripheral capitalism is based on, but not identical to, the imperialistic relationships developed between colonizing nations and their colonies. In this economic relationship, the players are the same – the colonizing nation becomes the “center”, while the colony becomes the “periphery” – but the role that each society plays is different from the classic imperialist relationship. The peripheral economy is marked by extreme dependence on external demand, or extroversion, as well as stunted and unequal rates of development within the society. Amin maintains that in order for these societies to break free of extroversion and develop, they must be actively removed from the peripheral capitalist relationship. He proposes nationalization and socialization as an alternative, a system which-when contrasted with peripheral capitalism-could not be a more different approach to economic development. Unfortunately for the developing nations, socialism was largely unsuccessful as an economic experiment, consistently causing stagnation and underdevelopment in societies that attempted it.
Peripheral capitalism evolves from colonial imperialism, an economic system in which the colonizing nation penetrates deep into the heart of the colonial economy in an effort to manipulate it towards the benefit of the mother country. Every aspect of the colonial economy is geared not towards the expansion of the colonial economy itself, but rather towards the production of something that the colonizing nation cannot produce itself. As a result, the success and the existence of a particular sector of the colonial economy is dependent upon whether or not the mother country has a need for that sector; colonial economies are rooted heavily in external demand. This extroversion leaves the colonial economy without an indigenous set of linkages, as economic sectors that will benefit from colonial activity function mostly within the economy of the colonizing nation. When autocentric, or internally-driven, economic growth is blocked in such a way that a peripheral economy emerges with the same sort of external dependence on the central economy that was suffered by the colonial economy.
The peripheral economy is typically plagued by an unequal division of labor, or specialization, between itself and the central economy. While the latter
enjoys the benefits and progress associated with industrialization, the periphery tends to remain predominantly agricultural. What little industry may exist in the peripheral economy is most often “light” industrial production of small, simple goods, as opposed to the “heavy” industrial production of machinery and complex products that characterizes the central economy. Additionally, Amin argues that there is often a “hypertrophy of the tertiary sector”(200) of the peripheral economy; too much of the economy is devoted to providing services, “expressed especially in the excessive growth of administrative expenditure”(201) effectively anchoring the society’s development due to a lack of productive advancement.
Yet another malady of the peripheral economy is the reduced value of the local ‘multiplier effect’, another result of the remnants of economic infrastructure modification from the colonial period. If an economy is replete with linkage sectors, then any money put into the leading sector will generate a multiplied effect in all of the forward and backward linkages of that industry. Peripheral economies, however, are effectively stripped of linkages during their colonial phase of development hence spending in the peripheral economy ultimately benefits the central economy, where most of the peripheral industries’ linkages are realized. Not only is the local multiplier effect reduced in the peripheral economy, but Amin claims that it also leads to “the marked propensity to import”(201), and thus is in effect transferred to the central economy, where revenue is collected every time money is spent in the periphery. Because peripheral input ultimately goes abroad, local businesses are not stimulated, as they would be if linkages were realized within the periphery, worsening the already-detrimental conditions of the peripheral economy. Adding to the lack of stimulation of local business is the fact that peripheral industries tend to be dominated by monopolies established from foreign capital. After the majority of revenue goes to the central economy through linkage industries, what little money remains in the local economy is often put into businesses controlled by central capitalists. In other words, almost every dollar put into the periphery ultimately finds its way to the central economy.
In Unequal Development, Amin maintains that no economy can be expected to
develop without successfully making the transition from extrovert to introvert so that it can “assert the dominance of the exporting sector over the economic structure as a whole”(203), and that no peripheral capitalist economy can independently heal the economic wounds inflicted by colonialism. Therefore, the only way to promote development in peripheral capitalist economies is to actively remove them from their disadvantageous relationship with the central economy, which, according to Amin, should be replaced by internal nationalization and socialization of the once-peripheral economy. The establishment of a nationalist socialist state would serve both to eliminate external dependence, as well as to reconcile the disarticulated nature of the local economy.
The first critique of Ricardo’s theory made by Amin is its lack of specificity – claiming that his examples of trade between Portugal and England were very exclusive to intra-European trade and could not exactly be applied to relations between several different country relations around the World. If there is a large difference in GDP between two countries, then what statistics demonstrate is that the country with the smaller GDP would benefit more from this transaction, and this was “the source of special problems that dictate[d] development policies in the periphery that [were] different from those on which development of the West was based”(201); a factor that Ricardo hadn’t considered it in his theory. Another vital yet neglected consideration was the importance of the commodity in terms of a nations’ GDP: wine was a big section of the Portuguese GDP, greater than it was for England, so the trade benefited the Portuguese to a greater extent than it did to the British.
He elaborates upon this idea by explaining how the relation between central and periphery assumes the mobility of capital, since the centre is investing greatly in the periphery. What the periphery chooses to specialize in is to a large extent determined by the centre, since very often the selection comes after it has been forced to serve the imperial country. As he clearly states, this type of trade “compels the periphery to confine itself to the role of complementary supplier of products for the production of which it possesses a natural advantage: exotic agricultural produce and minerals”(200). The result is a decrease in the level of wages in the periphery for the same level of productivity than at the centre, hence limiting the development of industries focused on the home market of the periphery. The disarticulation due to the adjustment of the orientation of production in the periphery to the needs of the centre prevents the transmission of the benefits of economic progress from the poles of development to the economy as a whole. Overall, this is what Amin defines by ‘unequal specialization’, which in turn violates the conditions of Ricardo’s theory. Another argument that Amin makes involved the Keynesian multiplier effect. He claims that this effect does not take place to the situation at the centre because of its advantaged stage of monopoly, characterized by difficulties in producing surplus. Due to this unequal specialization as well as the significant propensity to import that follows, the effect is a transferring of multiplier effect mechanisms and the accelerator theorem from the periphery to the centre.
Furthermore, Amin includes the social aspect of this process, which is a result of the individual history of each nation and the power imbalance created. Amin finds that the nature of the pre-capitalist formations that took place previously and the epoch in which they became integrated in the capitalist system are both very important factors in determining the presence or lack of development to come. He also draws a line between two different terms, ‘peripheral formations’ and ‘young central formations’, whereby the latter, based on the predominance of a simple commodity mode of production, are capable of independently evolving towards a fully developed capitalist mode of production. Amin terminates by asserting “the domination by central capital over the system as a whole, and the vital mechanisms of primitive accumulation for its benefit which express this domination, subject the development of peripheral national capitalism to strict limitations”(202).
These countries would hence not gain equal benefits under this trade, only if the patterns of specialization were undertaken in more ideal conditions, conditions that approximated Ricardo’s theory more closely. Rather than being a positive force for development, this type of trade becomes a force
created under development. It will contribute to development in the centre, and underdevelopment in the periphery. He concludes that this inevitably hinders the development of peripheral nations: “the impossibility, whatever the level of production per head that may be obtained, of going over to auto centric and auto dynamic growth”(202).