The marginalist revolution in the late nineteenth century marked the beginning of the end of classical political economy and the birth of what came to be known as neoclassical economics (Sandelin et al. 2002). All three pioneers of marginal utility theory—Carl Menger (1871), William Jevons (1888), Léon Walras (1954) —referred to scarcity as the starting point for economic analysis. Through the work of these pioneers, especially Menger’s, the centrality of scarcity became a core premise for the advancement of contemporary neoclassical economics (see Hayek 2004:19; Robbins 1998:277). As a result, virtually every neoclassical economic textbook refers to scarcity—even though the field of economics is becoming increasingly differentiated.
I have argued in my research that scarcity problems are, and will remain, an important sub-set of problems, but we need to include sufficiency and abundance problems as well (Daoud 2007, 2010, 2011a, 2011b, 2015, 2017). Under scarcity, economics will give us insights about how people optimize their behavior to get as much as possible out of their limited resources. Neoclassical economics is mainly interested in what we can call allocation problems under a scarcity assumption. If actor A has a set of resources R, that is scarce in relation to fulfilling a set of wants W. Neoclassical economics tells us that a rational actor will optimize his or her resources in such a way that person can derive as much utility U as possible given the circumstances. These types of problems are central to many social science issues—they face governments allocating a limited budget to a myriad of popular demands, they face the individual in deciding if he or she should go to university or take a job. As social scientist, we need to keep analyzing these situations.Read More »
On Saturday, April 19th 1817, David Ricardo published The Principles of Political Economy and Taxation, where he laid out the idea of comparative advantage, which since has become the foundation of neoclassical, ‘mainstream’ international trade theory. 200 years – and lots of theoretical and empirical criticism later – it’s appropriate to ask, how is this still a thing?
This week we saw lots of praise of Ricardo, by the likes of The Economist, CNN, Forbes and Vox. Mainstream economists today tend to see the rejection of free trade implicit in Trump and Brexit as populist nonsense by people who don’t understand the complicated theory of comparative advantage (“Ricardo’s Difficult Idea”, as Paul Krugman once called it in his explanation of why non-economists seem to not understand comparative advantage). However, there are fundamental problems with the assumptions embedded in Ricardo’s theory and there’s little evidence, if any, to back up the Ricardian claim that free trade leads to balanced trade. On this bicentenary, I therefore think it’s timely to revisit some of the fundamental assumptions behind Ricardo’s theory of comparative advantage, that should have led us to consider alternative trade theories a long time ago. Read More »
As people across the world are struggling to understand the rise of Trumpism, anti-establishment and anti-free trade movements, Erik Reinert (Tallinn University of Technology), Jayati Ghosh (Jawaharlal Nehru University) and Rainer Kattel (Tallinn University of Technology) have put together an impressive Handbook of Alternative Theories of Economic Development that can help make sense of what’s going on. As the field of Economics has become increasingly narrow since the 1970s, many important scholars and theories have been excluded from the field, and since forgotten. This Handbook presents rich historical accounts and ideas that can help explain economic and social development, and is a much needed attempt to correct for the existing biases in the field of Economics.Read More »
This blog post provides insights from what I have come to call the legal political economy perspective to critique the World Bank and neoclassical economics more generally. At the heart of what has been called the World Bank’s Third Moment in Law and Development is the claim that government involvement is necessary to eliminate “market failures” and promote both business development and social justice.
In contrast to the mainstream Law and Economics (L & E) approach, which informs the Third Moment, my position, derived from the Critical Legal Studies (CLS) tradition (and its historical ancestor, Legal Realism), is:
- Property is fundamentally a bundle of rights and thus property ownership at its core entails coercive power struggles between rivals and between owners and non-owners; coercion at its core.
- The interrelatedness of law and power relations (“If the program of Realists was to lift the veil of legal Form to reveal living essences of power and need, the program of the Critics is to lift the veil of power and need to expose the legal elements in their composition” (Gordon 1984, 109)). These power struggles over economic outcomes occur within the context of background laws that determine property, contracts, and torts.
- The notion of an economic seesaw in Hale’s framework with potential for instability in property and contractual relations.
- If the goal is to understand how legal structures shape power struggles then the question becomes how are the laws themselves to be determined? Following the CLS perspective, I would emphasize the role of ideational factors determining the intellectual underpinnings of neoliberal policies—factors that have consciously been created by the financiers of the L & E tradition.
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‘As a step toward that ideal it seems to me that every lawyer ought to seek an understanding of economics. The present divorce between the schools of political economy and law seems to me an evidence of how much progress in philosophical study still remains to be made. In the present state of political economy indeed, we come again upon history on a larger scale, but there we are called on to consider and weight the ends of legislation, the means of attaining them, and the cost.’ (Oliver Wendell Holmes; 1897) 
The World Bank’s policy focus shifted in the 1990s from a market-oriented paradigm to other issues such as social justice, poverty reduction and “market failures”, where institutions had to play a greater role . Known as the Post-Washington Consensus or the Third Moment in Law and Development, this new paradigm emphasizes the importance of “good governance”, the implementation of property rights for economic growth, and makes the following proposition: well-defined and formalized property rights lead to market efficiency, economic growth and development. Hence, since then the establishment of the “rule of law” has become the new goal to reach for developing countries.
However, this Law and Economics paradigm relies on a narrow set of theoretical assumptions and is heavily influenced by neoclassical views of the state, the market and overall competition. But this framework raises some questions: (a) are these assumptions empirically valid, namely is the implementation of property rights a necessary condition for economic growth and development? And (b) are “perfect competition” and “market failures” reliable concepts one should start from to cope with development – if by such term we mean a social and economic process that will ultimately increase human well being?Read More »
Morten Jerven, image via Wikimedia
Development economics as a field of study was formally launched in the 1950s by the Afro-Caribbean economist Arthur Lewis who, out of necessity, wanted to understand how his own country, Saint Lucia, could transform from an agro-based economy into a modern industrial state (later, in 1979, Lewis was awarded the Nobel Memorial Prize in Economics for this work, the only black person to have won the prize to date). For Lewis, the key to providing a satisfactory answer to the problem of underdevelopment lay in studying those societies as they were and not in comparing them to some mythical ideal. Saint Lucia, like all developing countries, had a lot of underemployed labor in its agricultural sector. The question was how best to marshal this valuable resource into driving industrialization.
Sadly, development economics has moved away from Lewis’ pioneering contribution of studying poor countries on their own terms. For example, today’s development economists explain Tanzania’s lack of development as stemming from its inability to be more like Sweden. This way of studying development, termed the “subtraction approach”, has led us down a dark alleyway where there is more confusion than elucidation. That, at least, is the charge leveled by economic historian Morten Jerven in his book Africa: Why Economists Get It Wrong published in 2015, but still circulating and prompting debate in academia and amongst practitioners.
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What is development economics? The answer will undoubtedly vary widely depending on whom you ask. I’ve said that this blog aims to take a critical approach to development economics, but what does that mean?
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By Douglas McDonald [re-blog from NSER]
Last Friday was the Debating Development conference, organized by the titular scholars of INET’s Young Scholars Initiative, a group coordinated by NSSR’s own Ingrid Kvangraven. The conference put many scholars of different regions and different theoretical perspectives in conversation. Although it was titled “debating development,” as NSSR economics professor Sanjay Reddy noted in his opening remarks, most of the perspectives presented were more intersecting than mutually exclusive, so the conference could also be understood as a means to compound or complexify perspectives, rather than adopt or discard them.
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