As I have stated before, historians are often influenced by what’s going on around them when they write about the past. In the 1950s and 1960s, the newly-independent countries looked as though they might experience their own industrial revolutions. That led to an interest among historians in the early Industrial Revolution. [1]
Economists caught the enthusiasm, too. They viewed the great potential of these countries and expected an Industrial Revolution—what W. W. Rostow called these countires’ “take-off.” [2] But that period of enthusiasm was followed by disillusionment. It turned out that many countries failed to achieve the take-off that seemed right at their doorstep.
I suggest that the economists were looking at the wrong things.
More than 20 years ago in an article for the Journal of Private Enterprise [3] I wrote about economists’ views of development as reflected in Paul Samuelson’s famous textbook. (That’s the one you probably read in your first economics class if you are of a certain age.)
I looked at Samuelson’s treatment of international development in four editions of the textbook, 1951, 1961, 1964, 1985. In them he reveals both his own views and those of other leading development economists.
In the 1961 edition, optimism for growth still reigned.
Technology Embedded in Capital Equipment, He Thought
Samuelson believed all the necessary technology invented since the Industrial Revolution was embedded in new capital equipment. “The new lands do not have to develop still unborn Newtons to discover the law of gravity,” Samuelson wrote cheerfully. “They do not have to go through the slow meandering climb of the Industrial Revolution.”[4]
So he proposed a plan to help an imaginary country, Alertia, stimulate her (yes, her) economic growth. Samuelson wanted Alertia to improve her tax system, provide “social overhead capital” (that is, infrastructure), make government loans to the private sector, and at the same time retire public debt.
Those proposals reflected Samuelson’s view that there were not enough savings in underdeveloped countries to supply capital equipment (the equipment that embedded 200 years’ worth of technology). Nor were foreign companies likely to invest. The funds had to come from somewhere. That is why he endorsed the World Bank and the International Monetary Fund, which lent money to the governments of developing countries.
Continuing his 1961 narrative, Samuelson did raise some doubts about the benefits of Alertia’s protection of her “infant industries.” She was also subsidizing her airport and steel mill, suggesting that special interests or national pride might be shaping her industrialization. Nevertheless, he concludes, Alertia “presents a fascinating spectacle. No one knows quite where she is going; but to everyone this much is clear: she is on her way.”[5]
Heavy-handed Growth Theories
But she wasn’t.
In the next edition (1964), Alertia has disappeared. In this book, the development chapters begin to carry ponderous growth theories by economists like W. W. Rostow and Paul Rosenstein-Rodan.
Samuelson senses that something has gone awry—not with the theories, but with the countries’ activities. For example, some countries’ emphasis on industrialization—capital investment in factories, utilities, and transportation—has led to a neglect of agriculture. And some governments were building visible evidence of industrialization, but were not experiencing the process.
“Proponents of industrialization may be confusing cause and effect,” he said pointedly. “Rich men smoke expensive cigars; but going out to buy an expensive cigar will not make you rich.”[6]
What went wrong? A great deal, some of which I discuss in my article. The power of special interests was formidable in those countries, whose governments were sometimes one-man states. But the economists’ recommendations were often faulty, too.
The most important point is that the economists were looking at the wrong things. They thought they knew the components of growth: capital investment, population, natural resources, and technology. But the forces for growth were actually something different.
While the development economists were focusing on the old stand-bys, favorable forces for growth were beginning to appear, but largely unnoticed . Three economists, Joseph Connors, James D. Gwartney, and Hugo Montesinos, have just discovered those forces and coined the term “The Transportation-Communication Revolution” to describe them. [7]
In my next post I will explain what they have found and why it was revolutionary.
Notes
[1] An example of this comparison is Phyllis Deane’s excellent 1965 book The First Industrial Revolution (Cambridge: Cambridge University Press).
[2] Samuelson, Economics: An Introductory Analysis (New York: McGraw-Hill, 1964), 761.
[3] Jane S. Shaw, “Paul Samuelson and Development Economics: A Missed Opportunity,” Journal of Private Enterprise 15, no. 1 (Fall 1999): 18-35.
[4] Samuelson (1961), 790.
[5] Samuelson (1961), 796.
[6] Samuelson ( 1964), 763.
[7] Joseph Connors, James D. Gwartney, and Hugo Montesinos, “The Transportation-Communication Revolution: 50 Years of Dramatic Change in Economic Development,” Cato Journal 40, no. 1 (Winter 2020), 153-198.
Image of Hong Kong Skyline by moritzklassen of Pixabay.