The term development is a very multifaceted ideology. The definition of development refers to the overall enhancement of human welfare, living standards and social well-being of a population. This can also be expressed as the general process towards attaining the needs and wants of the population. Therefore, development can be subdivided into the general tenets that culminate into overall development. Some of the key definitions that comprise development is economic and social development. Economic development has been used to characterize the overall improvement in the country’s welfare in terms of national wealth, health, education, quality of life and human welfare. It also defines how wealth is distributed within a country. One of the facets that may define economic development is economic growth. Macroeconomics define economic growth to be the general increase in the output of goods and services and is conventionally measured as a percentage increase in terms of real gross domestic product commonly referred to as GDP. The calculation basically utilizes real GDP figures which are usually inflation adjusted figures. Carter and Harding argue that economic growth may be registered in an economy however, without proper distribution of the said income, economic development may not be registered in the economy. Thus economic development simply goes beyond economic growth and attempts to define how the living quality of the population has improved through the said growth.
On other hand, development also includes social development. Similar to economic development, the term social development includes several facets that seek to enhance the welfare and social relation in the society. Hence, it can be argued that social development seeks to define the manner in which individuals in the society find more value about themselves.
Theorist and scholars have taken concerted effort to define development. The theories presented herein are neo institutionalism and neo classical theories. These theories will be discussed on the basis of their theoretical definitions that have been explored in the tenets of economic growth. Some scholars have taken particular interest in the neo-institutionalism or the new institutionalism theory in defining the concepts of economic development. On other hand other scholars have taken neo classical models to define the same. This research paper evaluates the theories of economic development as it has been applied over the years. The research further evaluates the difference between the theories of development and provides a personal opinion, based on evidence, as to which of the approaches is better.
There are fundamental concepts that define development or economic development. These concepts have also been discussed within the precepts of improving the living standards of citizens within a country. Improvement in living standards can be viewed as the level of goods and services that individuals can either purchase or have access to, improve access to proper health care, good communication and transport infrastructure, improvement in the life expectancy of the population and improving literacy standards (Maddison, 24). Thus economic development can be viewed improvement in the productivity and efficient, commonly referred to as economic efficiency. In this sense, it is the increase in the outputs without any considerable change in input capital, energy and materials. For instance in the Green revolution, there was development in the kind of seed introduced for farming, thus the productivity levels of the farms increased without increasing energy or land size.
However, increase in production of an economy does not necessarily imply improvement in living standards. In some cases increased production levels may lead to increased population growth thus the benefits of increased production are not realized. Thus situation was first examined by Thomas Robert Malthus who stated that when the population growth of a country outstrips increase in production, the economy is said to be caught in Malthusian trap (Galor, 18). Conversely, other economists argue that there cannot be increased production without population growth. Thus Lucas asserts that for an economy to enjoy this fruits of increased production, more efficient and innovative methods of production must be consistently developed in order to accommodate population growth ( Lucas, 56).
The above concepts and ideas call for the discussion of the first theory, Neo institutionalism. This is theory that is based on the idea that development can be defined in terms of institutions and the role that the institutions play in the society. The theory is based on the suggestion that institutions provide a basis of interaction between the society and in a sense define the manner in which individuals behave (Lucas, 31). The theory further proceed to describe the manner in which several institutions tend to displays similar organizational structures, isomorphism, and thus define the manner in which economic development is achieved. Developed by theorists such as Walter W. Powell and Paul DiMaggio, the concepts of neo institutionalism are as wide and varied.
Having introduced neo institutionalism, it is vital to review fundamental concepts of neo institutionalism. The general theory of neo institutionalism is based on the fact that every society is composed of several institutions that operate in a similar environment. According to Rajan and Bird such an environment can be referred to as the institutional environment and just like human relation, neo institutionalism imposes peer pressure on institutions (56). And much like the human world, institutions have to struggle to survive and in this case the survival terms to economic development to attain institutional authenticity among other institutions.
Carter and Harding explain that studies into neo institutionalism has also developed hypothesis on the impact of institutions on the character and behavior of human beings through frameworks, institutional norms and rules (Carter, 42). Studies have indicated that institutions may impact the character of human form two basic fronts. One of the ways that neo institutionalism can affect human character has been defined by the Rational Choice Institutionalism, where individuals seek to capitalize on benefits within the institutions. Here, following institutional norms of making the most of every situation individual tends to take up the idea. The second manner in which institutions can affect human character is may defined through historical institutionalism where individual only stick what they are supposed to do. This theory defines that normative institutional model keeps the society to within the scope of what is expected of them.
An additional concept that emerged for neo institutionalism is Social Institutionalism. This theory asserts that neo institutionalism has created a cognitive type influence in the society. In explaining the theory, Jones illustrates that individuals do what they do not because of sort of social obligation neither is it because of fear for any reprimand. Instead, social institutionalism argues that human character is based on the cognitive perception that no other action is plausible. A direct result of review of alternative-based decision making process associated with institutions. This, in a sense, suggests the idea that human character is now determined by predisposed and a direct result of institutionalized thought process ( Jones, 58).
The concepts of can be applied in development in several ways. The discussion into the concept of neo institutionalism can be as varied and non-deterministic in both social and economic facets. However, it is of paramount importance that these concepts be directly applicable in terms of political structures and subsequent development. Several models of applicability of these theories have been explored by different scholars. One of the approaches on the applications of neo institutionalism on politics has been defined in explanatory terms. Galor argues that the concepts of neo institutionalism can be seen a social construct through which politics and policies can be defined. In this regard, politics and other aspects of policies are defined through institutional constructs (Galor, 24).
The implication is that economies will then develop in a manner that is defined by the institutions that exist in that economy. In this regard, the theory is assertive that institutions that are defined by the political construct have a bearing on the nature and eventual development status of an economy. Politics has the role of defining these institutions and the society take queue on the manner in which these institutions have been developed.
The theory also calls for a state where each institution is to strive develop itself in the presets of maximizing benefits accruing to it. El-Erian and Spence argue that the concepts of institutionalism are for each of the institutions to attempt and survive through economic development ( El-Erian & Spence, 81). This allows individuals and the general population to take cognitive measures that ensure economic development is implemented.
It is of imperative importance to review the other theory as proposed by other scholars, that is, neo classical theories. This theory was developed in the 1950s by two economist Trevor Swan and Robert Solow. The two attempted to explain long term sustained economic growth by using economic equations and models. These equations were particularly concerned with the relationship between labor-time, investment, capital goods and output. This theory, commonly referred to as Solow-Swan Growth Model, assumes that countries would use their resources efficiently and thus the law of diminishing returns on capital applies in a free market economy. From the above assumption therefore, the neoclassic theory produces three important predictions.
The first prediction that the Solow-Swan Growth Model produces is that if capital was to be increased in the labor force, then there will be economic growth due to the fact that people are more productive with access to more capital (Lucas, 24). However, this prediction is based on the assumption that free market based none interventionist activities of a government is maintained. The second prediction is that poor nations with less capital per person will record a higher growth rate due to the diminishing returns to capital assumption. Finally, Swan and Solow argue that due to the diminishing returns principles, at some point economies will no longer be able to record economic or increased returns even with increasing capital. This point of zero returns on investment is referred to as steady state (Jones, 89).
Moreover, the model also provides a means by which economies can overcome this steady state. In the model, a steady state situation can continue to be productive and stimulate population growth by means of innovation and technology. The Solow-Swan Growth Model appreciates that in the long run, output per capital is dependent on saving rate of the economy and that rate of output growth for any economy will be equal to the saving rates. Thus it explains the exogenous relation that exists between economic growth and development of new technology and increased production levels.
Neo Classical model of economic growth have faced several criticism. One of the greatest critics of neo classical models of development is the founder of modern theories of macroeconomics John Maynard Keynes. Keynes opposed the idea of neoclassic economic theories that pointed out that a free market would, in the short term, provide adequate demand to sustain employment for the economy. Instead Keynes argues that aggregated demand is the sole determinant of employment and that insufficient aggregated demand would lead to high rates of unemployment (El-Erian and Spence, 89). In thus sense, Keynes asserts that the economy should provide its population with the ability to increase purchasing power. Keynes asserts that increased purchasing power translates to increased aggregated demand. Keynes continues to warn of financial losses and governments have to developed measures to mitigate the impacts of such losses (Galor, 45). He was one of the earliest proponents of stringent fiscal and monetary policies in guiding economies out of depression and recession. In fact, during the harsh economic times of 1970s, Keynes was instrumental in helping governments craft monetary policies that called for investment in technology and innovation to increase production capacity.
The two approaches to development are extremely varied in their approach and application, a comparison of the two provides insights to these approaches. While neo institutionalism views development as a result of growth based on constructs defined by the society, neo classical models view economic development as a result of interaction between laws of economics. This allows a discussion as to the advantages of neo institutional approaches over neo classical model
One of the advantage that neo institutionalism present over neo classical models is that concepts forwarded by neo institutionalism appreciates the fact that growth is as result of human and institutional interaction. In essence, it appreciates that just as humans are social beings that interact to create a society, so do institutions to create an economy. The concept put forward then allows development to be defined with the institutional constructs. A second advantage that can be expressed is that neo institutionalism puts human character into the concept of economic growth. This puts into context the fact the development cannot be discussed outside the ideals human character and the influence of the society as a whole.
However, there are several disadvantages that can be presented against neo institutionalism. One of the greatest disadvantages that can be presented is the abstract nature in which these theories can be used to explain development. While neo classical theories can be expressly defined and proved to have direct relation with regard to development, neo institutionalism has its theories rather in a conceptual nature. The second disadvantage that neo institutionalism present is that it fails to address the simple constructs of economics with regard to impact of influence of government on development. While development and economic growth is largely influenced by government and other forms of regulation, neo institutionalism simply encapsulates these into an institutional construct without defining the extent of such influence.
On taking a standpoint, neo classical model is in all the preferred the theory. While the ideas presented by neo institutionalism are quite plausible in their sense of analysis and synthesis as used in economic development, the concepts presented by neo institutionalism are not better as compared to other theories such as neoclassical theories. This is due to the fact that while institution has a huge bearing on the manner a society behaves, to fails to address key question that development would present. For instance, neo institutionalism defines that a society develops according to the social constructs that are predetermined. However, the approach fails to define the intricate elements that define development.
On the contrary, neo classical model, though less refined, attempt to break down the elements of development and define how these elements define economic development. Thus, it can be argued that neo classical model eliminate the abstract nature of illustration that is presented by neo institutionalism. In addition to these issues, neo classical models have been refined in their application by modern theories such as Keynesian theories. These modern theories, based on neo classical models, have largely been applied by several economies in turning around their poor economic situations.
In conclusion, several approaches have been developed by different scholars in attempting to define economic development. Each of these approaches has a wide a variety of illustrations and definitions conceptualizing the ideas behind economic growth. Neo institutionalism is one such theory which views an economy to be composed of interrelated institutions. These institutions have a bearing on the manner in which an economy behaves and thus prospers. On the other hand, Neo classical model simply define economic growth as a result of interrelated components such labor, capital and investment. The extent to which these theories are varied provide a basis to define the better approach. In this case the neo classic model has been found to have plausible and applicable concepts.
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