Constraints. Induced Innovation. Miscellaneous on Philosophy, Methodology and Theories Constraints Natural Resources Resource Constraint Ricardo Marx Breaking the Resource Constraint for Industrializing Countries – Science-Based Agriculture Development through Natural Resources Environmental Constraint Theory of Induced Innovation Marx and New Institutionalism

Miscellaneous on Philosophy, Methodology and Theories Problem of normative judgements System Theory and System Method Thomas Kuhn and Revolutions in Science Example: Marginalist Revolution in Economics Methodological Wholism x Methodological Reductionism Example: Model for optimal number of children Models as simplifications of reality

Resource Constraint Malthus (1798) was the first who pointed out the possibility of the growing relative scarcity of natural resources as a binding constraint on economic growth The Club of Rome (1972) presented a report “The Limits to Growth” Population –food crisis Natural resource exhaustion Environmental degradation due to overexploitation and waste of natural resources resulting from the exponential growth in economic activities Prediction for the first two decades of the twenty-first century: industrialization would stop and death rate increases Now - What is your opinion?

Resource Constraint Ricardo (1817) Mechanism Behind - Malthusian Ricardian Trap Solution: Trade Liberalization (Source: Hayami: Development Economics)

Resource Constraint Marx For Stylized Explanation – Ricardo Model Can Be Used Mechanism Behind: Industrial Reserve Army (Source: Hayami: Development Economics)

Breaking the Resource Constraint for Industrializing Countries - Science-Based Agriculture Why did real grain prices not rise when closure of open land frontiers in the USA coincided with the acceleration in population growth (around 1920)? Green revolution in developing countries in the 60ies and 70ies (Source: Hayami: Development Economics)

Development through Natural Resources The staple theory A staple means a major primary commodity which plays a leading role in expansion of exports from empty lands The “Dutch disease”

Environmental Constraint (Source: Hayami: Development Economics)

Theory of Induced Innovation - Principles Theory of Induced Innovation – basic force is the scarcity of resources and the will to have success Example 1: Transition from the hunting and gathering economy to the agricultural and pastoral economy Basic force – scarcity of resources =scarcity of food Accumulation of knowledge – in tangible (physical) and intangible (human) capital Cattles and seeds and the knowledge how to take care of them Change of institutions – property rights First to livestock and standing crops, later extended to land Success is survival

Theory of Induced Innovation - Principles Theory of Induced Innovation – basic force is the scarcity of resources and the will to have success Example 2: Transition from the „small firms capitalism“ to „capitalism of corporations“ Basic force – scarcity of resources =scarcity of financial capital Accumulation of knowledge – in tangible (physical) and intangible (human) capital Usually succesful firms with „know-how“ go public Change of institutions – property rights Protection of small shareholders Success is economic power (market share, rate of profit etc)

Theory of Induced Innnovation – Institutional Innovations Institutions are public goods. Public goods have two basic properties: non-excludability and non-rivalness – problems of free-riders The supply of public goods in response to social needs is determined through political process. Various interest groups take part in this process For the supply of public goods, someone must organize collective action Collective action is usually much less organized than a society optimum level is, public goods are usually undersupplied

Theory of Induced Innovation - Import of Innovations A wide gap exists in technology and institutions between developing and developed economies This gap could be – through transfers – a potential source of rapid economic development for developing economies Basic problem is to incorporate informal institutions (e.g. cultural traditions) appropriately

Theory of Induced Innnovation – Institutional Innovations Marginal analysis of politicians´ decision making Marginal revenue: marginal increase in his utility from the strengthening of his power base Marginal cost: marginal disutility of his time and effort (increase because of the free-riders’ problem increases with the quantity)

Marx and New Institutionalism economic infrastructure and social superstructure major time lag between increases in production capacity and changes in superstructure (institutions) core institution is the property right assignment of a key production factor at each stage of economic development gap between the institution and the production potential is ultimately closed through a violent political revolution

Marx and New Institutionalism Emphasis on changes in relative resource endowments and prices due to population growth and other factors Institutions are not so inflexible to make a violent revolution inevitable But, if the cumulative adjustment of institutions by such means as informal agreements and reinterpretation of laws and codes is not sufficient, a violent revolution may occur