He starts off by giving Amartya Sen’s definition of development as enlarging peoples choices capabilities and freedoms etc. He defines development as a property of the economic and social system itself. He defines it not as a series of individual successes but an emergent property of the complex system as a whole which expands people’s choices, capabilities, and freedoms. Development harnesses the strength of adaptation and self-organizing complexity to not only accelerate evolution, but also change it. It is a gradual process of firms becoming more productive.
One of the biggest questions that they wanted answered is why nations grow and to explain why it was that South Korea fared better in the long run than Ghana did. A graph of economic growth was presented and showed that from 1960 there was exponential growth in the income of south Koreans whereas Ghana saw little to no growth. This created a huge transformation in the lives of the people in South Korea. However, there are limits to these economic models because income is not a complete measure of well-being and when looking at these we are worried about distribution and not just averages. There is this multi-dimensional nature of poverty in development.
He decided that he was going to make an electric toaster from scratch. He bought the simplest toaster that was 400 parts and was going to attempt to make all of those parts. He needed steel so he went to an iron ore mine to get some iron to melt into steel, but he was unable to get his rubbish bin hot enough to melt it. He also tried to go to an oil rig to get a jug of oil to make some plastic, but he wasn’t allowed He was unsuccessful which showed that something as cheap as a $5 toaster requires many different technologies the economy has to be sufficiently sophisticated and rich to supply all these benefits. Points towards that development is not an increase in output by an individual firm but the emergence of economic, financial, legal, social, and political institutions firms’ products and technologies – you need a legal system to enforce contracts, a workforce, financial system to provide capital etc.
This model said that to make a unit of output you need to combine a certain amount of capital. A firm is able to increase its output if it increases the capital it uses. Provided evidence that capital and not labor is what was constraining these countries who were trying to develop. Walter Rostow wrote “the stages of economic growth” in which he proposed development as a virtuous circle. This states that when investment rises, capital rise, triggering an increase in growth, then income, and savings. He said that for poor countries, if you could increase investment by 5 or 10% of national income this would initiate virtuous cycle and “launch the country into self-sustained growth. Rostow’s model made a huge impact and influence on foreign aid and donors like the World Bank
This emphasized the gap in the Domar model which was that it is loosely connected to reality. When we looked at the capital and labor figures for South Korea and Ghana, we can’t explain why SK grew so fast in comparison to Ghana. Solow created the neoclassical growth theory which introduced a third component in addition to labor and capital. He called this technical change and when combined with labor and capital, it increases the output of each firm. We don’t know where this technical change comes from. This model fits the data much better but is really only a form for counting which breaks growth down into increases in labor and capital and technical change. This model tells us that the gap between rich and poor countries is explained fully by negative growth in technology
The steel works was the largest steel investment ($5 billion) in Nigeria. It cost the Nigerian taxpayer $29 million just in wage. They had the capital and the labor but they were producing no steel. This led to the conclusion that the problem with this was management and endemic corruption. So overall, institutions were the problem. The book “Why nations fail” gives an account of why the governance agenda has not lived up to its expectations. Acemoglu and Robinson say that common development practice is based off an incorrect assumption that countries are poor because their rulers don’t know how to run their country. It is because it suits the elites to run the country that way. It helps them to maintain their power. This book says that we should try to engineer prosperity by providing the right advice. It is not weak institutions that are the problem but a direct result of the country’s politics.
Barder argues that models are lacking a lot of information especially any explanation for the differences we see in countries. Models still have not predicted why some countries are experiencing rapid economic growth after “tens of thousands of years of relatively little economic changes” and other countries do not. He also outlines these missing ingredients that could be capital, technology, better institutions, etc. But these are all endogenous and not something that can be provided from outside.
There is a strong connection between firms and products adapting and his idea of creative destruction. Nokia started off as a manufacturer of tires and rubbers but got into the cellphone business. This is a good example of how firms can adapt to new opportunities. However, Nokia hasn’t made the switch yet from phones to smartphones which has caused it to be overtaken by Samsung as the largest manufacturer of smartphones. Productivity doesn’t come from within firms but from the creative destruction process in which old firms go bust and then are replaced by new firms which are better adapted to today’s environment. Co-evolution is the large number of varying adaptive processes going on. People adapt, products adapt, institutions adapt, industries adapt. All of these interact with each other as they coevolve and changes in one can led to a change in another.
It is a rich set of interactions between a very large number of adaptive agents all of which are coevolving. Examples of this include climate, weather, the human brain. There are 5 important features of these systems and they are all difficult to predict in perfect detail due to the butterfly effect. You can make broad predictions about the system as a whole though the detail is unpredictable. They have emergent properties which are patterns of system which are not specifically linked to any individual agent within it. Thunderstorm is an emergent prop of the atmosphere – you can’t say that any particular water molecule is in a stormy state but it’s the way they interact which gives you the thunderstorm. These systems tend towards greater complexity because the evolution of products and firms happens faster than biological evolution there are vastly more different products than biological species on the planet. They do not tend towards an equilibrium and tend to be stable and then unexpectedly make large fast changes.
He was the last emperor of the feudal dynasty in Ethiopia before it was overthrown in 1974. In his book he talked about how Ethiopia and Angola extracted economic value from their population and suppressed any efforts that would threaten their position. Ethiopia’s elite class was able to suppress the coevolution of more plural and more equal economic and social institutions.
He argues that engineering solutions are almost impossible, and the product has to change and adapt to the particular environment it is in. He also says to avoid isomorphic mimicry and gives an example to exemplify this – It’s easier to create an organization that looks like a police force than it is to create an organization that can actually enforce the law. Steve Jones was working for a soap company to create a nozzle that was more efficient. It was hundreds of times more efficient which is a major characteristic of adaptation – startling/game-changing improvements. This exemplified the idea that people, products, firms (or industries), institutions all adapt, and they all interact and then coevolve.
The idea of resisting fatalism means that we can both accelerate and shape evolution without just accepting whatever the results of it are. Norman Borlaug essentially started the green revolution by increasing agricultural production. He intervened in the evolutionary process to develop “high-yield disease resistant wheat varieties.” He used cross-breeding and was estimated to have save over a billion people from starvation around the world.
Innovation depends on well-organized publicly funded research and development and is extremely important as well as embracing creative destruction because the system has to incorporate feedback loops which promote adaptations suitable to that environment. The reason command economics and autocratic regimes fail is because there is an absence of effective feedback mechanisms to force performance in economic and social institutions. Another recommendation he made was to shape development in which selective pressure needs to be applied that represents the goals and values of the community.
Nicholas Georgescu-Roegen was a Romanian mathematician and economist. His insight about economic systems and evolution involved this idea of irreversibility and how evolution could not be reversed. He was a strong believer in creative destruction as an important foundation for capitalism.