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The Irrationality of Rationality July 19, 2016

Posted by OromianEconomist in Uncategorized.
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Odaa Oromoorational constrained choice


The confined view of rationality regarding humans has strong relevance while carrying out activities like trade and exchange. Although rationality must not be ignored, understanding other key drivers behind transactions could widen our approach to comprehending and applying economics.

For instance, why do some universities conduct exams without an invigilator? Or why do most people value products they use beyond their monetary value (such as a coffee mug or passes for a cricket match)? Or even with no waste bins, why do some roads stay significantly cleaner than the others?

To answer the above questions, one would have to move away from the usual notion of maximising self-interest. Much literature has come to light during last few decades by behavioural economists and psychologists such as D. Kahneman, A. Tversky and others, in the field of psychological sensitivity. They suggest that various characteristics determine the choices that one makes. Most importantly, they point out that these reasons are beyond the maximisation of self-interest of the individual. Some of these characteristics include attitudes of people, such as higher aversion to losses of wealth and possessions than to identical amounts of gains, or a bias towards an unlikely or a rare event, or any limitation of memory due to biological factors……. Read more at:-

http://theindianeconomist.com/the-idea-of-rationality-2/


 

Ethiopia: The chronic shortage economy: What is the price and utility of a kilo of Sugar in Finfinnee (Addis Ababa) in terms of never ending queue? August 27, 2015

Posted by OromianEconomist in Economics, Famine in Ethiopia.
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Economic performance and size of government

In the midst of fastest growth hype and official statistical lies,  Ethiopia has been plagued by high rocketed prices for basic goods,  intensive and chronic shortages in all sectors of  economy. This is the situation of  TPLF ( fascist government and monopoly)  controlled economy experiencing declining production (supply deficit)  relative to  citizens demand for basic necessities. In dealing  with bureaucratic corruption that tinkers with distribution,  citizens are experiencing  long queue (disutility) in cities  for basic goods  for which  very limited  supply is  available. They may be approved or disapproved to get access to the purchase  by TPLF local cadres decisions. It has been reported that Ethiopia’s rural areas are in catastrophic famine. Widespread shortages, spiraling inflation and famine  are fueling humanitarian crisis.

This is the Ethiopian capital Addis Ababa (Finfinne) where the population of the early morning standing in long lines under the blazing sun (Sunday August 2015) for the purchase of sugar, oil and other basic goods

This is the Ethiopian capital Addis Ababa (Finfinne) where the population of the early morning standing in long lines under the blazing sun (Sunday August 2015) for the purchase of sugar and oil. Cars, children, women, old and adult, all are in never ending line. Source: http://www.ayyaantuu.net/addis-ababa-this-is-eleven-percent-yearly-growth-in-ethiopia-endless-lines-for-sugar/

The Tigray only and unbalanced discriminatory growth: Severity of poverty increases in Ethiopia, UNDP reveals in its National Human Development Report 2014 which was launched on 1st May 2015. May 3, 2015

Posted by OromianEconomist in Africa, African Poor, Amnesty International's Report: Because I Am Oromo, Ethiopia's Colonizing Structure and the Development Problems of People of Oromia, Free development vs authoritarian model, Poverty, Schools in Oromia, The State of Food Insecurity in Ethiopia.
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“All animals are equal, but some animals are more equal than others.”

-George Orwell, Animal Farm

“The very common way that the EPRDF and its agents try to shift the public attention from lack of human and democratic rights and the daylight looting of the country’s resources, is by referring to the ‘impressive’ economic development registered in their rule. If they are talking about the only region that they are exclusively devoted to developing, then, they are absolutely right.”

https://oromianeconomist.wordpress.com/2015/04/07/opinion-why-ethiopias-growth-rhetoric-is-faulty-africa/

In TPLF /Tigray dominated minority tyrannic regime of Orwellian social and development policy, all nations and nationalities  in theory are equal in Ethiopia, but in reality Tigray  is more equal than others. This is not a development process.

According to UNDP report, while more than  45% of children in Tigray have achieved Net Lower Secondary Enrollment, the statistics for Oromia is only 16.9%, very huge inequality variations. The report indicated that  while Human development Index (HDI) of Tigray is the highest (above national average),  states  such as Oromia,  Afar, Ogaden and Amhara have the lowest HDIs, below the national HDI of 0.461. These are the outcomes of Tigray only, exclusionist, social, economic and development policies of the ruling regime. UNDP is not exposing the Tigray only growth and development strategy but we can read from its data and graphs.

Ethiopia, expected years of schooling Ethiopia, National Human Development Report 2014 expected year of schooling by regions

As the TPLF has been engaged (https://oromiaeconomist.wordpress.com/2014/10/30/amnesty-internationals-report-because-i-am-oromo-a-sweeping-repression-in-oromia/) in destabilizing, robbing and massive evictions of people from their ancestral home and land grabs in Oromia, by all sorts of engagement, resource and soil transfers,   it has conducting massive  subsidized development  in its Tigray home. In other studies,  BBC Magazine in its 20th April 2015 publication  under the title ‘ Turning Ethiopia’s desert green,’reports: ” A generation ago Ethiopia’s Tigray province was stricken by a famine that shocked the world. Today, as Chris Haslam reports, local people are using ancient techniques to turn part of the desert green. In the pink-streaked twilight, a river of humanity is flowing across Tigray’s dusty Hawzien plain. This cracked and desiccated landscape, in Ethiopia’s far north, occupies a dark corner of the global collective memory. Thirty years ago, not far from here, the BBC’s Michael Buerk first alerted us to a biblical famine he described as “the closest thing to hell on earth”. Then Bob Geldof wrote Do They Know It’s Christmas? – a curious question to ask of perhaps the world’s most devoutly Christian people – and thereafter the name Tigray became synonymous with refugees, Western aid and misery. The Tigrayan people were depicted as exemplars of passive suffering, dependent on the goodwill of the rest of the planet just to get through the day without dying. But here, outside the village of Abr’ha Weatsbaha, I’m seeing a different version. From all directions, streams of people are trickling into that human river.” http://www.bbc.co.uk/news/magazine-32348749.

Martin Plaut’s analysis which is based on world banks report is also interesting and important to refer here which is as follows:-

The World Bank has just published an authoritative study of poverty reduction in Ethiopia. The fall in overall poverty has been dramatic and is to be greatly welcomed. But who has really benefited?

This is the basic finding:

In 2000 Ethiopia had one of the highest poverty rates in the world, with 56% of the population living on less than US$1.25 PPP a day. Ethiopian households experienced a decade of remarkable progress in wellbeing since then and by the start of this decade less than 30% of the population was counted as poor.

There are of course many ways of answering the question – “who benefited” – were they men or women, urban or rural people. All these approaches are valid.

The Ethnic Dimension

But in Ethiopia, where Ethic Federalism has been the primary driver of government policy one cannot ignore the ethnic dimension.

Here this graph is particularly telling:

Ethiopia poverty reduction

Tigray first

The answer is clear: it is the people of Tigray, whose party, the TPLF led the fight against the Mengistu regime and took power in 1991, who benefited most. What is also striking is that the Oromo (who are the largest ethnic group) hardly benefited at all.

This is what the World Bank says about this: “Poverty reduction has been faster in those regions in which poverty was higher and as a result the proportion of the population living beneath the national poverty line has converged to around one in 3 in all regions in 2011.”

The World Bank does little to explain just why Tigray has done (relatively) so well, but it does point to the importance of infrastructure investment and the building of roads. It also points to this fact: “Poverty rates increase by 7% with every 10 kilometers from a market town. As outlined above, farmers that are more remote are less likely to use agricultural inputs, and are less likely to see poverty reduction from the gains in agricultural growth that are made. The generally positive impact of improvements in infrastructure and access to basic services such as education complements the evidence for Ethiopia that suggests investing in roads reduces poverty.”

Not surprisingly, the TPLF under Prime Minister Meles Zenawi and beyond concentrated their investment on their home region – Tigray. The results are plain to see.  https://martinplaut.wordpress.com/2015/01/23/ethiopias-poverty-reduction-who-benefits/

In its  2014 National Human Development Report, which has been written on the theme of “Accelerating Inclusive Growth for Sustainable Human Development in Ethiopia,”  UNDP indicates that 25 million Ethiopians currently remain trapped in poverty and vulnerability. This and many Ethiopians just above the poverty line are vulnerable to shocks and food insecurity. Maternal health care has lagged well behind other health statistics and the availability of effective health care is inconsistent across the country. UNDP’s educational indicators suggest ongoing problems with the quality of education, as shown by retention rates and educational performance markers.  UNDP says, perhaps most worrying from the standpoint of inclusive growth are the high rates of un- and underemployment in both urban and rural areas, especially as large numbers of productive jobs for the poor and near-poor are needed under current and projected labour market trends. Economic growth over the past decade has generally meant an increase in productivity and output levels in some parts of the economy, but these have been accompanied by increasing severity of poverty.  The absolute number of the poor is roughly the same as 15 years ago and a significant proportion of the population hovers just above the poverty line and is vulnerable to shocks. Moreover, the severity of poverty 2 increased from 2.7 per cent in 1999/2000 to 3.1 per cent in 2010/11 (MoFED, 2013b). The prevalence of vulnerabilities  and food insecurity are  on the rise.

According to UNDP report, during the last three years (2010/11-2012/13), inflation was in double digits. The inflation rate, which was 18 per cent in 2010/11, increased to 33.7 per cent in 2011/12, declined to 13.5 per cent in 2012/13 and fell further to 8.1 per cent in December 2013. Other studies demonstrate that inflation figures have always been in double digits including 2013 and 2014 and at present.

Further,  UNDP says with a Human Development Index (HDI) of 0.435 in 2013, the country is still classified as a “low human development” country, based on UNDP’s Human Development Index. Even though Ethiopia is one of the 10 countries globally that has attained the largest absolute gains in its HDI over the last several years,  in the most recent Human Development Report (2014) Ethiopia ranks 173rd out of 187 countries. Thus,  its Human Development Index (HDI) has not moved appreciably during the past decade, when compared with other developing countries that have registered similar growth rates. Looking at the HDI values of Seychelles, Tunisia and Algeria, which are in the high HDI bracket, and the other 12 African countries, which are in the medium HDI bracket, the major reasons why Ethiopia is still in the low HDI bracket are low education performance (particularly low mean years of schooling) and low GNI per capita. The minimum mean years of schooling and GNI per capita for medium HDI countries were 3.5 years and US$3,000, respectively in contrast to Ethiopia’s mean years of schooling of 2.6 years and GNI per capita of US$1,300. The inequality-adjusted Human Development index (IHDI), which is basically the HDI discounted for inequalities, is also computed for Ethiopia. Between 2005 and 2013, the IHDI increased from 0.349 to 0.459 indicating an average human development loss of 0.5 per cent per annum due to inequalities in health, access to education and income. According to (UNDP 2014), Ethiopia’s IHDI for 2013 was 0.307 in contrast to HDI of 0.435 indicating an overall human development loss of 29.4 per cent.

With regard to regional disparities in HDI values, while Tigray is significantly above national average,  the four states of Afar, Somali, Amhara and Oromia have the lowest HDIs, below the national HDI of 0.461.

The outcome of the development  strategy of Tigray only when mathematically averaged to the whole  regions cannot hide TPLF’s Apartheid policy  on Oromia and the rest as it is only the development focus for 5% of the  94 million population. Thus, Tigray is rich but Ethiopia is poor. Ethiopia is rich and fast growing only for development tourists those who lodge in Finfinne and  tour to Tigray to take  a sample and conclude the result for the whole states.

With regard to regional disparities in HDI values, while Tigray is significantly above national average,  the four states of Afar, Somali, Amhara and Oromia have the lowest HDIs, below the national HDI of 0.461.

Another social indicator which  demonstrates that Tigray is more equal than others is  health services. UNDP’s report confirms that there are wide inequalities in the immunization status of children in Ethiopia. Children of educated women, rich households, and  Finfinnee (Addis Ababa) and Tigray State have higher chances of being fully immunized. Children from the richest and middle income households are less likely to have no immunization at all (by 74 per cent and 57 per cent respectively) compared with those from the poorest households. Children from SNNPR, Oromiya and Amhara are 3.82, 7.00 and 3.65 times less likely to be fully immunized compared with those from Tigray, which has the second highest proportion of fully immunized children.  According to UNDP,  a report by Save the Children (2014) also raises concerns about equity in health services citing how immunization coverage is different among different income groups, and between urban and rural areas. According to the report, children from richest households are twice as likely to be immunized compared to those from the poorest households and children in urban areas are twice as likely to be immunized as those in rural areas. Based on revised data from the National Water Sanitation and Health Inventory, national potable water supply coverage increased from 58 per cent to 68.4 per cent between 2009/10 and 2012/13, reflecting an increase in both rural and urban coverage. Even though many health outcomes have improved significantly over the last decade, Ethiopia is still lagging behind on some measures. For example, Ethiopia has still higher than expected shares of malnutrition compared with countries at the same income level. What is especially striking about Ethiopia’s health data is the exceptionally high level of maternal mortality, given Ethiopia’s income level.

UNDP argues that that development can be inclusive and reduce poverty only if all people contribute to creating opportunities, share the benefits of development and participate in decision making.

Ethiopia at a Glance (UNDP Report Data)

Ethiopia at glance, UNDP Data

Population: 85.8 million (2013)

GDP: US$46.6 billion (2013)

GDP per capita: US$550 (2013)

Annual Average Br/US$ exchange rate: 18.3 (2012/13)

Life expectancy at birth (years): 62.2 (2013)

Primary school gross enrolment rate (%): 95.3 (2012/13)

Births attended by skilled health professional (%): 23.1 (2012//13)

Contraceptive prevalence rate (%): 28.6 (2011)

Literacy rate (% of both sexes aged 15 and above): 46.7 (2011)

Unemployment rate (urban) (%): 16.5 (2012/13)

Unemployment rate among urban youth (15-29) (%): 23.3 (2011/12)

Areas further than 5 km from all-weather roads (%): 45.8 (2012/13)

Mobile phone subscribers (million): 23.8 (2012/13)

Poverty incidence (%): 26.0 (GTP/APR 2012/13)

HD Index: 0.435 (2013) HDI rank: 173/187 (2013)

http://hdr.undp.org/sites/default/files/nhdr2015-ethiopia-en.pdf

Nash equilibrium – Game Theory February 3, 2015

Posted by OromianEconomist in Economics, Nash equilibrium, Uncategorized.
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ONash Equilibrium

 

‘A Brief Introduction to NON-COOPERATIVE GAME THEORY – Like most really powerful ideas, the basic notion of Nash equilibrium is very simple, even obvious. Its mathematical extensions and implications are not, however. The idea of this natural “sticking point” is that no single player can benefit from unilaterally changing his or her move — a non-cooperative best-response equilibrium. Competitive Markets come to rest at Nash equilibrium, and the special structure of competitive markets makes them efficient. (As we will see in another game.) But it is important to recognize that MOST Nash-Equilibria are NOT efficient. What do we mean by not efficient? It’s just the idea of getting the “whole pie” — that if we’re really using the whole pie, then no one can get any more unless someone else takes less. That’s the economist’s basic idea of allocative efficiency. A famous game is called “Chicken,” named after a famous adolescent hot-rod ceremony from the United States of the 1950s. Say that Boeing and Airbus are both considering entering the jumbo jet market, but that because of increasing returns to scale and relatively low demand, there is only enough room for one of them. The game matrix (called the “normal form” of a game) could look like this. (This example is taken from an article by Paul R. Krugman, “Is Free Trade Passe?” in the Journal of Economic Perspectives, Fall 1987.)’

Modern AfroIndio Times

Game theorists use the Nash equilibrium concept to analyze the outcome of the strategic interaction of several decision makers. In other words, it provides a way of predicting what will happen if several people or several institutions are making decisions at the same time, and if the outcome depends on the decisions of the others. The simple insight underlying John Nash’s idea is that one cannot predict the result of the choices of multiple decision makers if one analyzes those decisions in isolation. Instead, one must ask what each player would do, taking into account the decision-making of the others.Nash equilibrium has been used to analyze hostile situations like war and arms races[2] (see prisoner’s dilemma), and also how conflict may be mitigated by repeated interaction (see tit-for-tat). It has also been used to study to what extent people with different preferences can cooperate (see battle of the sexes), and…

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Introduction to Microeconomics: Understanding Market Economy January 17, 2015

Posted by OromianEconomist in Economics, Uncategorized.
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O

 

“Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy.”

Daddy Duck Innovation Lab

Economics Basics: Supply and Demand

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy.

Market Economy is a system largely determined by  free enterprise. It is a system in which decision regarding investment, production and distribution are based on supply and demand, and prices of goods and services are determined in a free market and free price system. Markets determines the allocation of resources and economic resources are privately owned.

Market is made up of people, consumers and entrepreneurs, attempting to buy and sell on the best term possible. Through the grouping process of give and take, they move from relative ignorance about others’ wants and needs to a reasonably accurate understanding of how much can be bought and sold at what price. The market function as an ongoing information and exchange system.

A free market is…

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Introduction to Economics January 17, 2015

Posted by OromianEconomist in Economics.
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https://www.khanacademy.org/economics-finance-domain/macroeconomics/gdp-topic/econ-intro-in-macro-tutorial/v/introduction-to-economics?v=8JYP_wU1JTU

https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supply-demand-topic/monetary-fiscal-policy/v/monetary-and-fiscal-policy?v=ntxMOKXHlfo

How an Economy Grows and Why It Doesn’t October 9, 2012

Posted by OromianEconomist in Uncategorized.
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http://www.youtube.com/redirect?q=http%3A%2F%2Fvforvoluntary.com%2Fhow-an-economy-grows&session_token=vMriu7hC9ECS_Shm4y9n0dEUDdV8MTM0OTg4MDg5NEAxMzQ5Nzk0NDk0

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Methodological Individualism as a development Model and its Critics June 27, 2011

Posted by OromianEconomist in Economics: Development Theory and Policy applications, Temesgen M. Erena.
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JEL: A11, A23, B13

Methodological Individualism as  a development Model and its Critics

Temesgen M. Erena (DPhil), Economist

The orthodox (neoclassical) world view comprises research programmes that are basically concerned with applying the tenets of neoclassical economics to the study of developing economies. From such a perspective, the principles underlying the economics of developing economies are the same as, or can be considered extension of those governing the economics of developed nations. This implies that meaningful epistemological activities within the development economics cannot be conducted without first determining its inextricable intellectual and analytical ties to mainstream economics.

According to Rostow (1960), the critical intention of development  has been seen as the achievement of ‘high mass consumption society’ that can be measured by the level of per capita income.  In this context, the inherent aim of development seems to materialise a society that reproduce  the political economic system of the western Europe  and North America, i.e., a competitive private enterprise  based on the foundations of   free market economy and a representative and democratic political system. Rostow (1960) has detailed this historical process of development in his schema of   stages-of- growth model. Charles K. Wilber (1988)  argues that  the application of this model as centre of assay  of the course  of development  supposes that  present day developing countries  reckon  to the ‘traditional society’  stage  or at the ‘preconditions’ stage in relative to the present stages of western developed countries. Like so, the contemporary developed countries were formerly underdeveloped,  hence, all countries  progress in the course of  these stages.

In the extreme, the Orthodox (Neoclassical) strand theorises that since principles of economics are universal, there is but one economics, whose basic tenets are equally valid for both developing and developed economies, David (1986). In other words, it is considered inappropriate to speak about two distinct economics- one for developed countries and the other for developing countries. In this case, the, the dominant interpretive model of thought is based on a ‘universalist’ epistemology or ‘one world’ ideology and ‘aesthetic’, which assumes the existence of a continuous and homogenous world, David (1986). Contextually, knowledge and society are viewed in terms of discrete individual elements that become the continuous and homogenous phenomena of economic and social life through a process of aggregation.

The neoclassical paradigm stands on universalist, rationalist and positivist methodological pillars. In addition to the influence  of positivism and other rationalist  patterns of reasoning, neoclassical economic thinking  also makes heavy use of the concept ‘mechanical equilibrium’, which is explained by the self-regulating operation of equilibrating forces. Such forces, it is argued, not only tend to maintain equilibrium of the economic system but also to restore this equilibrium once it has been disturbed by external forces.

In its evolution, the concept of equilibrium has had to be based on some conception of the economic system. Accordingly, it was thought that the evolution of any logically consistent economic order required some institution of private property as well as a sharp conceptual distinction between the economic system and other aspects of social reality, David (1986). This led to an emphasis on capitalistic, free enterprises ethic based on the principle of individualism. In the conception, individuals are considered to be at liberty to organise their social relationships in accordance their own interests, cole, etal (1991). Society hence, becomes no more a collection of individuals, and an individual behaviour, the goal and standards of moral behaviour.

The neoclassical paradigm is based on individualistic and libertarian philosophy. The philosophy postulates that the ultimate constituents of society are individual people who act appropriately in accordance with their own dispositions. In other words, the argument is that no social tendency exists that theorising about classes and other activities can only be represented by mental constructs, which are abstract models for interpreting certain relations among individuals. One implication is that it is impossible to have laws about society. Another is that the good of individuals is primarily objective of society as opposed to the neo-Marxist which emphasis that of the society as whole, Cole etal (1991).

Economic models, theories, and conceptual systems should be considered as device that merely helps the analysts to remember certain predictive regularities in observed phenomena, David (1986).

A related implication follows from the widespread acceptance of the “science as science” methodology. These are based on the claim that search for knowledge should be governed by scientific objectivity and the commitment to universal values that cut across national frontiers. Adherence to universal epistemological principles implies that there are common standards of scholarship and, as others argued there cannot be Chinese, Nigerian or Egyptian criteria for truth and validity. Commercial farms can be nationalised, criteria for truth cannot.

The universality epistemology finds a foremost representation in the study of resource allocation. The underlying principle that all societies must make decisions about the degree of sacrifice that must be made if resources must be allocated efficiently. This is based on the assumption of the universal scarcity of resources relative to human needs.  Given scarce resources, it is impossible to satisfy all of the society’s goals simultaneously. Therefore, if scarce resources are to be efficiently utilised, they must be properly allocated.  The possibility of deriving meaningful benefits from the use of these resources is therefore forecasted upon the nature of sacrifice. The problem of economic decision making in conventional economics is therefore coined in terms of a “cost-benefit” calculus. The neo-classical approach to this problem emphasise the need for rational choice in the use of scarce resources. The basis of this approach is that if the alternatives presented to us are not rationally chosen, resource scarcity is likely to increase within the passage of time, hence, impairing current standards of living and decreasing the possibility for future economic growth, David (1986). In this regard, the neo-classical, explanation of economic behaviour tends to rely heavily on competitive equilibrium, which assumes  that the behaviour of free markets and prices provides the necessary conditions for individual economic agents to achieve maximum economic welfare and personal liberty, Todaro (1991)|.It is based on the methodological individualism mentioned previously, the implication being that individual economic decision-making units (household), firms, national governments, and so on)| are free and rational actors whose behaviour is guided by harmonious equilibrating force, David (1986)|.

The whole economy is assumed to consist of a large number of interacting markets that have a tendency to clear, that is, reach equilibrium, with the latter defined in terms of equality between demand and supply, and price. (These conditions are assumed to take place for individual markets, that is, partial equilibrium, or in other aspects where there is a set of relative prices for all goods and services, resulting in a simultaneous clearing of all markets that is general equilibrium. Given the quantities of resources of all kinds available to economic agents, consumer tastes and preferences, and production technology, the problem of general equilibrium revolves around the determination of the relative quantities of goods of all kind that will be produced and consumed, the prices at which they will be exchanged and how the earnings derived from resource utilisation will be distributed, Cole et al (1991)|.

Income distribution is thus treated as a special case of the general theory of price relations. The over all argument is that it is possible for self-interested individuals in a market-oriented economy to strive for and receive, their fair share of income and wealth created by the competitive process. In this context, the neo-classical model indicates that the marginal productivity forms the basis for payments to all factors of production. The assumption is that individuals have at their disposal a set of factors endowments and that income merely represents the sum of the product of these factors and their marginal products. The evolution of factor shares and incomes over times thus depends on factor prices and quantities, the elasticity of substitution among factors, changes in demand patterns, and the capital or labour savings bias of technological change.

It is therefore assumed that, given completive conditions and perfect information, resources will be efficiently allocated. Adjustment in factors prices are expected to bring equality in factor shares, with each factor receiving its ‘just’ or equitable reward. Under the circumstances, any attempt to enforce equality in the prevailing pattern of income distribution is considered inimical to economic growth and efficiency. To the extent that inequalities exist, they should be considered necessary for guarantying productivity levels, David (1986)|.

The implications of the marginal productivity theory of income distribution can be further explained by considering the distribution of labour and capital incomes. In the case of returns to the human factor (wage and salaries), the theory suggests that differences in marginal productivities can be explained by differences in both innate and acquired abilities. These differences tend to be particularly acute in those societies, for example, developing economies where highly skilled labour is in short supply relative to the large supply of unskilled labour. The argument, as is that individuals with relatively scarce skills would receive quasi-rents. These rents and other payment differences would disappear as more people acquired skill through education and training, David (1986). Hence, they argue that any attempt to equalise wages and salaries would prove to be inefficient. The implicit assumption is that pay differentials  not only reward those with superior natural abilities  but also serve as an incentive to those not so blessed to acquire skills to increase their productivity  and efficiency, Hunt (1989). Given a set of competitive prices, the actions and reactions  of individual economic agents will determine the quantities of goods and services demanded, and these will be matched with the quantities supplied in the various markets of the economy, David (1986). The achievement of such an over all equilibrium requires two sets of conditions.  First, these is a subjective one in which the individual pursues the goal of maximum income satisfaction. The second is an objective one in which the market provides for these incomes and wants based on the maximum profit goals of business people. Thus, through the equilibrium between demand and supply, with all markets cleared, the optimum economic position reached by each individual economic agent becomes compatible with that attained by others.

The general equilibrium analysis (Varian, 1990)  postulates that, in principle, the set of equilibrium prices tend to provide all the information that each individual economic agent needs to have in order to be able to co-ordinate its activities with those of all other economic agents in the economic system, Cole et al (1991). It is therefore, based on the assumptions of perfect competition and knowledge and foresight, and the absence of uncertainty. This ensures that the essential adjustments would take place of a disequilibrium situation were to arise.  Where prices diverge from their equilibrium values, inconsistencies will arise in the plans economic agents, and they will be forced to adjust to an equilibrium situation. The underlying  assumption is that the operation of the market is based on  a negative feedback mechanism that reduces differences to zero through iterative price adjustment processes are also assumed to be stable.  This means that once the system diverges from its equilibrium with a process of automatic readjustment would take place. Full employment is also implicitly assumed.  With demand for goods and services equal to their supply, labour market will also clear. Neoclassicals consider this equilibrium to be the most efficient one, and thus the standard against which particular sectors of the economy as a whole should be appraised. The reasoning is that when over all economic agent will have reached an ‘optimal position’, that is, one that it cannot possibly improve by altering its behaviour. This is the ideal state described by Pareto and also known as a Pareto efficient allocation. It is considered to be the most efficient state and implies that any attempt made to improve a given economic agent’s position would have to be at someone else’s expense (David, 1986, Varian, 1990).

The general framework outlined above is also replicated in analysis of international economic relationships. In this case, trade and exchange are considered to be two of the most effective weapons for promoting resources allocation, distribution, and growth. This follows from assumptions of harmony of interests among nation states, patterns of trade based on comparative advantage, an equitable distribution of the gains from trade, and the free international flow of resources. The same normative forces are assumed to operate both nationally and internationally, with the private market considered to be the most effective mechanism for allocating distributing resources in all spheres, Hunt (1989|).

Consequently, the  neoclassical (orthodox) school of thought attribute  problems of developing economies essentially to the ‘dirigiste dogma’ and the ‘denial of economic principle’  (Lal, 1988); to over extension of the public sector; to economic controls which distorts the market and have unexpected and undesirable side effects; and to an over emphasis on investment in physical capital (spending on lavish prestige projects such as sport facilities, conference centres, brand new capital city, roads leads to nowhere, irrigation schemes that damage soil) compared to human capital. And they have proposed these setbacks to be neutralised to overcome inadequate development, Toye (1987). They took the form of supply side macro-economics and the privatisation of public corporations and call for the dismantling of public ownership, planning, and regulation of economic activities. By permitting free markets to flourish, privatising state owned enterprises, promoting free trade and export expansion, welcoming  foreign investors, and eliminating the plethora of government regulations and price distortions in factor, product and financial markets, the neoclassical argue that economic efficiency and economic growth will be stimulated, Wilber (1988). Contrary to the claims of the political economy strands (neo- Marxist world views) which are subjects of subsequent discussions, the neoclassicals (Orthodox) argue that the third world are underdeveloped not because  of the predatory activities of first world and the international agencies that it controls, but rather because of the heavy hand of the state and corruption, inefficiency, and lack of economic incentives, Todaro (1991).

It is assumed that development  experience of western industrial countries is a model for the developing economies of today and therefore, neoclassical economics is universally applicable. It is held that the international capitalist economy does not discriminate against developing economies, but when conformed to it acts as an engine or motor of growth. What is needed, therefore, is not a reform of the international economic system or restructuring of dualistic developing economies or an increase in foreign aid or attempts to control population growth or amore effective central planning system. Rather, it is simply a matter of promoting free markets and laissez faire economics within the context of permissive government that allow the magic of market forces.  And the “invisible hand” of market prices to guide resource allocation and stimulate economic development, Todaro (1991). They are quoting to us the failures of the public interventionist economies of African countries, Toye (1987).

Neoclassical policy is based on  faith in  the price mechanism to bring about an equilibrium in the economy which maximises welfare and growth, (i.e. development by their terms), “Efficient growth… raises the demand for unskilled workers by getting the prices right… is probably the single most important means of alleviating poverty,” Lal (1983). This process of development raises the standard of living of the poor via the ‘trickle down’ effect. Intervention by the government is unnecessary as a measure to alleviate poverty and would retard growth by distorting the market mechanism, holding up sustainable development. According to Lal, government policies dealing with  basic needs, surplus labour, decreasing terms of trade, etc., are misleading and incorrect.  He argues that developing countries are following the same economic patterns of development as developed countries.  Therefore, the same economic rules and considerations apply. Both he and Bauer criticise ‘dirigistes’ for implying, by their policies, that people of developing countries are not rational that the ‘market decisions’ have to be made for them. That would suggest Toye’s argument- governments fulfilling the desires of frustrating individuals has some validity. Being rational does not necessarily make people able.  It is within this context that the planning, growth with equity approach and a social market economy operation have come into considerations. However, such interventionist approach have been criticised by laissez faire economists as a reaction to far a recipe to failure. Lal (1988) points out that inefficient and incompetent bureaucracy as a cause of government failure. Attempts to intervene in imperfect markets serves to make things even further from the equilibrium of maximum efficiency and welfare. This is an over-sight, a generalisation which dismisses all past, present and future government intervention to make influence on disparities in income and accelerate development, as ineffective. This is clearly not the case.

The rapid development of South Korea and Taiwan in both intervening for growth and equity demonstrate this. Government policies concentrated on rural development, export oriented industrialisation were directly and indirectly dealing with inequality and poverty whilst promoting growth. It would be argued that all government intervention is not good. As is clear, some government intervention is and has bee ill advised- for example ‘the white elephants.’

But what is also becoming increasingly apparent is that the neo-liberal (Washington consensus) policies of liberalisation which the IMF and World Bank have made conditions for accepting loans have also created many problems. Not only have they quite often caused increasing inequalities in income distribution, but they have also failed to encourage growth in these countries. In many countries they have led to near chaos and crisis, in the economy as in many African countries, Lawrence (1986).  External influences, such as increasing oil prices, MNC transfer pricing, increase in debt burdens, increased protectionism  by developed economies, etc, mean that following free market principles lead to decreasing  terms of trade and created economic problems within the countries. D. Lal (1983) would say that this is acceptable because it is a step in the right direction towards free market economies. Toye (1987)  believes the neoclassical  approach neglects the issues and treats  and treats  the solutions, In a reductionist manner, over looking  the complexity of the issues and gives an over simplified solution.” Lack of past successes cannot simply be blamed on government interference with the price mechanism to account for the relatively poor performance of these economies would require a very detailed historical analysis of class forces and class struggle within these countries, of the effects of international strategic and geo-political factors as well as the effects of drought other climatic/ecological disasters, Sender et al (1986).

Neoclassical according to Sender and Smith, have paid too much attention to anti-interventionism- when it would be more beneficial to concentrate on improving what intervention is necessary. It is harmful for economists to adhere to policies which can only be relevant in a hypothetical ‘perfect market’ economy. The post- colonial period has been characterised by an astonishing absence of any coherent, analytical/ideological framework within which to formulate state intervention of an effective and suitable kind,” Sender et al (1986). Neo-classicalists need to address the conclusive historical evidence concerning the role of the state in all late industrialising countries in considering policy formulation.

The laissez faire economists edge on economic growth through the operation of the market mechanism (Adam Smith’s the famous invisible hand) as the key to development. There are also economists  who emphasised planning (government intervention) to supplement or supplant the market. As in the former, the latter  and economic growth has been taken as the essential of development. Meanwhile, the growth with equity economists contemplate on the distribution of the remunerations  of growth to the deprived.

Neo-Marxist  and dependency theorist, two main school of thoughts in the  Political economy paradigm,  are broadly apprehensive of the nature of the progression by which development is attained, Wilber (1988).

Classical Marxism was always, of course, a theory of development, i.e., of capitalism and its development, and transition to socialism. The theory was never adequate, however, in dealing with development problems of third world especially underdevelopment issues. Classical Marxists, after all, consider capitalism as historically progress, in every way an advanced over previous production systems, even if it is to be replaced by socialism one day. “ Imperialism was the means  by which techniques, culture, and institutions that had evolved in western Europe over several centuries… sowed their revolutionary seeds in the rest of the world,” Warren (1980).

Seers (1987) argued that Marxism thus arrived at conclusions similar to those of many neoclassical economists, since both derived from Smith and Ricardo and the economics of the 19th century. He further pointed out that both doctrines assume competitive markets and the overriding importance material incentives. They are both basically internationalist and also optimistic, technocratic and economist. In particular, both treat economic growth as development and due primarily to capital accumulation.

According to Hunt (1989), the neo-Marxist paradigm derives from an attempt to develop and adapt classical Marxist theory to the analysis of underdeveloped economies. The paradigm gained widespread influence in the late 1960’s, providing an ideological and analytical framework for radical critiques of contemporary theories. Drawing their inspiration from the ideas of Marx and Lenin, and influenced also by other early Marxists, particularly Rosa Luxemburg, the neo-Marxists set out to investigate a problem that Marx himself had touched on only briefly- the process of economic change in the economies of Asia, Africa and Latin America.

With respect to the third world, the primary concern of the neo-Marxists is with what is happening to national output and to its distribution, and why. Particularly in the 1950s and 1960s there was little concern on the part of leading neo-Marxists to explore the essential  nature of the models of production  that prevail within the periphery. Instead the emphasis was on the economic and political relations between the ‘centre’ and the ‘periphery.’ In the analysing these issues the neo-Marxists use a terminology for the key concepts in their analytical framework that appears to drive from Marxism with different interpretation to certain concepts.

The neo-Marxist school which is tracing back to the  work  of Paul Baran, differs from Marx in arguing  that capitalism will not be spread  from the ‘centre’ to the ‘periphery’  but rather that existing underdevelopment  is an active process linked to  the development of the centre by the transfer of the surplus, Baran (1957, 1988). As economic surplus was extracted, capital accumulation stopped, and budding industries were killed off by ‘centre’ competition. Development in colonies was forced off its natural course and completely dominated by imperial interests. The colonies stagnated between feudalism and capitalism  or the mix of both systems.

For Baran (1957) the real problem  in developing economies is not the presence of  the vicious circle- a phenomenon  whose existence  is acknowledged – but the lack of  a significant stimulus to development aggravated by the surplus drain.  Here again  we have  a polar view she said, something like a zero-sum game, in which the continuing primitive accumulation by the ‘centre’ implies a simultaneous negative accumulation for the periphery.  Surplus then, generate and maintain underdevelopment in the developing economies, a phenomenon whose existence is acknowledged – but the lack of a significant stimulus to development aggravated by the surplus drain. As Frank (1988) (dependency scholar) has called this leads to “the development of underdevelopment.”

Amin, too, adopts Frank’s Motto, but with an altered meaning; for Amin, it means a “dependent development,” that, is, an inappropriate pattern of growth imposed upon the country through its ties with the centre-  literally, through its being included in the world capitalist system. This view in turn allows for the possibility of growth aggregate income, an observed fact in many developing economies, Hunt (1989).

The crucial problem of how the available surplus is utilised in developing economies leads the political economy worldview to the examination of local elites. Writers like Baran and Sweezy argue that no local development is to be expected from such elites. On the contrary, the elites are by their very nature a factor contributing to underdevelopment.  The analysis is based on the “objective function” in which these elites find themselves. Their economic behaviour- conspicuous consumption, investments in real estate and extreme risk aversion, the export of their savings to be deposited with foreign banks for security, their avoidance of investments in industry- is, from the sand point of private advantage, essentially a rational response to the circumstances in which they find themselves. Their fear of foreign competition where they to invest in more productive activities is seen as fully justified. They argued that most elite members lack the capital retained for the establishment of enterprises able to compete with foreign oligopolies. Also lacking are entrepreneurial skills and attitudes to work and innovation conducive to growth, see Wilber (1988).

Amin offers the view that many members of the developing economies elites profit, too; from foreign activities in their country. What enables Amin to say this is his adoption of Emmanuel’s theory of unequal exchange, in which the level of wages is the major determining factor. That wages are lower in developing economies means that the labour force of these countries carries the burden of exploitation both by its local capitalist class and by the capitalist class at the centre. It is burdened by the “regular” exploitation of the home capitalists and the “primitive accumulation” of the capitalist class at the centre. The higher wages that the centre’s working class enjoys are in turn attributed not solely to its higher productivity; it does not partake of the proceeds of the continuing primitive accumulation, Todaro (1991).

That there is also a disheartening lack of entrepreneurial and administrative talent in the countries of the third world that the neo-Marxists do not deny. But they view those who place this fact at the centre of their explanations of underdevelopment as being eclectic and arbitrary. The claim that entrepreneurial and administrative skills will make their utilisation possible and necessary appears- conditions that cannot exist in an environment of dependence. This problem, they claim, is secondary: It is consequence of the fundamental problem, which is the discouragement and systematic sabotaging (or, for Amin, the guiding into incorrect path), of the local development efforts by the centre, Todaro (1991).

They recognise the existence of a ‘comprador states’ or class and bourgeoisie classes in developing countries but they maintain that their positions are solely dependent on the advantages they give to an imperialist power- not exist in their own right.

So the main consideration for government intervention would be, for neo-Marxists, the ability to make a complete and absolute change “the third world was and is an integral and destined to play a major role in the attempt of capital in the world capitalist economy to stem and reverse the tide of growing economic crisis, “Frank (1981, 1988). This is manifested in increasing repression of the workforce in developing countries, not increasing equality, or alleviating poverty. So in order to achieve sustainable development with equality it would be necessary for a developing country to withdraw from the world capitalist system. The present system only maintains present inequalities due to the interest characteristic of capitalism. They would advocate complete autarky facilitated by a socialist movement.

Generally, the political economy school advocate equity oriented development. The fundamental assumptions of this perspective regarding capitalism and international capitalist economy are essentially opposite to those of neo-classical economists. They not only believe that international capitalist economy discriminates against developing economies, but that is directly responsible for their dire condition. Thus any solution to the poverty predicament requires a fundamental break from the international capitalist economy. A distinction here, more for historical relevance than for the logic of the argument should be made between neo-Marxian and the Marxian of Marx, with (Marx) essentially regarded the capitalist commodity production process as progressive, in that it was required for the realisation of the ultimate inevitable tools of communism. Thus, capitalism for Marx is a necessary phase of societal change. Furthermore, for Marx the capital commodity production process is universally applicable.

The other fundamental disagreement these theorists have with neo-classical school concerns ethics. Equity, for these theorists is an ethical ideal, an end by itself. The logical extreme of this view is that equality must remain the primary objective, even at the cost of efficiency.

It is argued by this perspective that it is contrary to the interests of the international capitalist commodity process, which is essentially and exclusively concerned with maximisation of profit, to redistribute wealth. Instead of a y ‘trickle -dawn’ tendencies, the inner- logic of capitalism with only lead to greater accumulation, and concentrate of wealth. Thus, it is imperative for any comprehensive development effort to break with the internationalist political economy. Since weak political position of the poor prevents them from changing the system, empowering the poor becomes the means to meaningful development. These theorists contend that attacking the symptoms of poverty with basic needs provisions, or welfare laws will not suffice, it is crucial to attack its cause. The answer is the empowerment of the poor.

The general tendency is towards the satisation of the modes of production, at least those sectors of the economy that are essential to the public goods. Thus, only the intervention of a populist state, resulting on the commanding heights of the economy can restructure the relations of production that benefit  not a privileged few, but the unprivileged many.

This perspective defining the ‘left’ contours of the continuum in its logical extreme are diametrically contradicts the neo-classical perspectives.The obvious point of departure on the debate on development between the neo-classical and the political economy  strands  must be a definition  of development. This is inescapably a normative exercise, but one that should not be avoided  for this the reason. Development, by the very meaning  of the word, can only be a process  of the ‘becoming’.  The argument holds regardless of whether the tendencies are rectilinear, cyclical or both (or neither).  According to orthodox school sometimes implicitly  and sometimes explicit value judgement in the definition of development has been westernised. This tendency has been challenged  by the ‘development of another civilisation in East Asia, that is quickly achieving standard of  living comparable to the west. One conclusive inference that can be drawn from the experience of  Japan, China and the Asian Tigers is that a protestant ethic or generally a western social arrangement  or socialist revolution of neo-Marxist is not a prerequisite for economic development.

http://rodrik.typepad.com/dani_rodriks_weblog/2013/05/what-is-wrong-and-right-in-economics.html

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