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IKT 525 Development Economics

Murat Şenzeybek 

Homework 4

With current knowledge there is no perfect economic system which provides best growth and

development speed for countries. The success of the system related the conditions when it is

applied. Therefore important economics have different ideas about the best economic system.

But when they argue their method usually they do not reject everything about previous

systems. Frequently they are criticizing a point of previous systems and suggesting their own

solutions about it.

verything starts with !dam "mith# $e claims that if the market becomes free% thanks to the

&invisible hand' it could find the best way without any intervention. $e says there is a

harmony among economic agents of the society like workers% consumers% producers% and

landlords. Because of the competition inside these groups nobody can have a power to

dominate the market. This idea criticized many times because of the asymmetric information

 between producers and consumers. $owever his system provides very important idea progress

for world economy% many countries leave the current mercantilist systems

(ther significant contribution of "mith to the world economy is division of labor idea. Before

him a labor need to do every part of a production system. This system has remarkable

disadvantages% it is usually slow and there is huge risk to make a mistake during the process.

"mith realized this and suggested specialization for workers. $e said there is no need to know

all of the process by one worker% if he or she can be an e)pert a part of production system% he

or she certainly will make less mistake and be faster in his or her job. Thanks to "mith

suggestion a huge improvement in efficiency could be seen. With efficiency improvement

many countries national increased with an amazing acceleration.

!fter "mith another important economist *althus focused the relation between national

income and population growth. $e believe that &poor are responsible for their own misery'.

$e says because of the animal nature of humans% the population increases far faster than

increase in national income. $e believed population increases with a geometric progression

when food supply increases with arithmetic progression. Therefore increasing in national

income will not be enough to make countries richer. $e has a nice determination about the population and national income but empirical data says he was wrong. Because% he forgot the

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effects of technology on food supply. Thanks to the technology food supply have been

increased faster than arithmetic progression.

!nother economics who has contribution to the economics is +icardo with his diminishing

return and comparative advantages theories. $e says the most fertile lands are used firstly% and

then the quality of land reduces. ,t is called as diminishing return. $e also claim that if every

country produce the commodity which is relatively cheaper to produce compare to its trade

 partner both countries can be benefit from it. $e says every country need to be specialized to

 produce a product. But some of the products are more open to benefit from technology and

reducing costs. Therefore the countries need to consider this. These - writers can be classified

as classical economics and according to /0 in classical system economic growth depends

on physical capital accumulation.

*ar) has different ideas than classical economists. $e says capitalism made a great success to

increase national incomes but this increase shared by landlords. The workers 1he called

 proleriats 2 have the most important effect in this growth but they could not have enough

income increase.

 3eo classical economists become popular after *ar). They approached macroeconomics with

micro solutions and focused utility ma)imization of consumers and profit ma)imization ofcompanies. "olow and $arrod40omar 1mostly 5eynesian but has effect on neo classical

theory2 models are important here.

$arrod40omar says savings and output4capital ratio has a very sensitive balance. ,f a country

grows too quickly this caused inflation and if it grows too slowly it means idle capacity and

increased unemployment.

ventually "olow created a growth model which says technology and other factors are

e)ogenous effect on growth. Based on his formula he believed that poorer nations are

e)pected to growth faster than rich nations. !ccording to his savings and investments in poor

countries does not have enough share in their income.

6astly in his article +omer focuses endogenous growth convergence controversy% this method

says that gap between poor countries and riches will be closed rich countries like 7"! must

have -8 times higher saving rate 1from the numbers and e)ample in te)t2 to have same growth

rate. Therefore poor countries will grow faster than riches. But empirical data shows that it is possible with only 9 times higher saving rate.

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$e emphasizes spillover effect of knowledge. +ich countries have advantage because

knowledge spillover between industries. Therefore they do not need to have -8 times higher

investment ratio than poor countries. $e also says &when more people start prospecting for

gold or e)perimenting with bacteria more valuable discoveries will be found. 6astly he says

technology has a side effect on private investment decision endogenously.