Mainstreams of economic theory according to historical periods

Smithian notions regarding Economic growth: Economic growth, for Smith, depended on capital accumulation, which in turn depended on saving and the virtues of frugality self command.  Economic growth also supposed a culture rooted in morality, a system of natural liberty with respect for the higher virtues.                            

System of natural liberty means there is no artificial impediment to trade. Smithian observation behind economic growth and nation’s prosperity is division of labor. He explained that by specializing the various tasks involved in production , dexterity could be increased, time saved, and labor saving machinery invented by persons familiar with minute tasks. Then the products produced were exchanged through trade. With the improvements in transport, the market increased in size, labor became more specialized , money replaced barter, and productivity increased.  
Smithian thought about Market, Wage & Price: Smith regarded the market as a driving force for invention, innovation, risk taking. To check moral decline in trade and commerce Smith counterpoised the reform of education and religion to inculcate a new class of people with a secular morality that would replace Christianity. Opposed to mercantilism, Smith proposed to relatively free trade that would lead to an efficient allocation of resources. At the same time, he thought about a just political economy that would also encourage high wages. He added, a society activated by self-interest, needed a regulating medium, which turned out to be competition in the market place. His thought for a regulating medium emerged as support his observation. He observed, any producer motivated only by greed who charged too much for a product, or paid too little for labor, would find himself without buyers or workers. Over the long run, markets and free competition would force prices toward their natural, or socially just, level(“just” in the medieval sense). Self regulating markets were the “invisible hand” that transformed private interests into public virtuous institutions of social efficiency.        

Smith labor theory of value
Smith retained the medieval argument that the natural prices of commodities derived from their real costs. Natural prices were not merely levels around which market price would revolve, they were values that could be translated into moral terms. Smith thought that utility of a thing did not determine its price. Rather, the value of a commodity would be determined or any commodity if some one intends to exchange for other commodity, if the quantity of labor that was invested to produce the products is equal, the commodity could purchase.    
Labor is the real measure of the exchangeable value of all commodities, Smith said. In early societies, Smith observed the amount of labor used to produce exchanged commodities determined their value, while the whole product belonged to the laborer. After that when capital originated in saving from current revenue and was used to hire who produced value, they would be given wage. The proliferation of industries under state intervention emphasized on at that time to add the annual product of country. So, wage payment convention replaced the exchangeable value of labor. Again, when capital accumulates in the hands of particular persons, they naturally employ it in setting to work industrious people. The idea of profits then emerged and it must be given to the risk taker. Similarly, when common land became private property, landlords demanded rent. Thus, the price or exchangeable value of a commodity, in more advanced society came to be resolved into three parts: wage, profit and rent. Natural prices determined in this way, were brought into equality with market prices by competition. That is, where market prices exceeded natural prices landlords and capitalists        
Would shift land capital into the more profitable employment. With the reverse happening when market prices dropped below natural prices—hence productive efficiency and justice.
Also, while the accumulation of capital and its employment in mechanized production might eventually be stalled by scarcity of workers and high wages, Smith thought that, population too responded to market incentives, such that more children were born when wages were high, so, that growth could continue indefinitely without labor shortage. Hence an automatic mechanism produced productivity and growth without state interference. Self interested behavior directed resources to where they could best and most profitably be used, while all classes, Smith believed, shared in the benefits of progress. “Natural liberty implied free competition free movement of workers, free shifts of capitals and freedom from government intervention.
Another interpretation is that, “Smith’s labor theory of value was a defining statement : an impartial system of laws would establish a set of natural price that in principle would reduce to terms of human liberty, happiness and ease”.      







The Neo- Classical and the Keynesian Contribution:
The mainstream of the continued development of economic theory replaced the classical approach by the new classical one. Exception is that the thought of Karl Marks includes him in the classical or late classical era. Because, he used classical conceptual apparatus to develop theory. The main issue of this stream was how the market mechanism could optimally distribute the resources in society. In terms of development theory, the new-classical school is merely a parenthesis.
General Theory of Employment
John Maynard keynes’s theoretical contribution meant that macroeconomic problems returned as the key issue in economics. Keynes’s criticism was lent urgency by the onset of the Great depression in the 1930s. In times of depression and high unemployment in the industrialized countries, the problem was to employ existing but poorly utilized factors of production. In General Theory of Employment, and Interest and Money, Keynes argued that the aggregate demand and its various components (consumption & investment) were of strategic importance. He argued that, the creation of demand by supply (as with Say’s law) could occur at any level of employment or income. The particular level of employment, Keynes thought, was determined by aggregate demand for goods and services in the entire economy. An increase in expenditure, which in turn increased aggregate demand, would eventually lead to an increase in the level of economic activity and a decrease in unemployment.    
Assuming that, the government had a neutral effect. Two groups influenced aggregate demand: consumers buying consumption goods and investors buying production equipment. Consumers increased their spending as their incomes rose, although by a smaller proportion. However, this was not the key variable in explaining the overall level of employment, for consumption depended on income, which depended on something else. Thus, Keynes was primarily interested in short- terms problems of stabilization. Since the problems of underdevelopment are not radically different from those of the depression, he did not directly contribute to the theory of development.  
These long term problem, which Keynes intentionally disregarded were instead developed by two other economists- Evsey Domer and Roy Harrod. Independently of each other, and with somewhat different premises, they show the intimate relationship between an economy’s rate of growth on the opne hand and the other its level of saving and investment. This growth theory focused saving and investment and considered as the central force behind economic growth.


Interest & money
In the Keynesian system, real investment ( in new factories, tools, machines, and greater inventories of goods) was the crucial variable and changes in real investment fed into other areas of economy. Investment resulted from decisions made by entrepreneurs under conditions of risk. The decision to invest, Keynes said, depended on comparisons between expected profits and the prevailing interest rate. Here the key variable was “expectation” or, more generally the investor confidence. Keynes explained the interest rate not in terms of savers postponing consumption, but in terms of speculation about future stock prices, which in turn determined interest rate, as savings moved from one fund to another. This again depended essentially on expectations about the future. Investors brought machines, thereby providing income machine builders (companies and employees). In turn, these spent money, further increasing national income, with the “multiplier effect” (the degree of economic expansion induced by economic investment) varying with the proportion of additional income that was spent rather saved (marginal propensity to consume), and so on; a decrease in real investment had the reverse effects. The government could influence this process through interest rate and other monetary policies, shifting the economy from one equilibrium level to another, generally to higher employment levels.          

Keynes himself doubted that merely changing interest rates would be sufficient to significantly alter business confidence and thus investment. Conservative Keynesian economists have viewed the     manipulation of interest rates as a relatively non bureaucratic, non intrusive method by which the central bank of a country tries to influence national income and employments; an alternative is tax reduction. Liberal Keynesian economists see government deficit spending as a more effective measure; the liberal aspect is that deficit spending improves social services. While favoring the later course, Keynes thought that government spending, rather than the social part, was crucial; burying banknotes in old mines, filling these with refuse, and having private enterprise dig them up was better than nothing if the goal was higher employment rates and greater national wealth. When unemployment rose, thrift impeded economic growth. Keynes thus assaulted a basic tenet of puritan (and Smithian) economics, the identification of thrift with virtue.
 

Rostow Doctrine
Walt Rostow’s doctrine, which played an important role during the late 1950s and the 1960s, was a typical expression of this perspective. According to him, there were five stages through which all societies had to pass in order to reach a self sustaining economic growth:
1. the traditional society;
2. the pre take –off stage;
3. take – off;
4. the road to maturity;
5. the society of mass consumption.
1) In the traditional society, the level of technological knowledge was so low that it imposed an upper limit on per capita production.
2) The economic prerequisites for a pre take-off were created during the second stage, and many of the characteristics of the traditional society were then removed. Agricultural productivity increased rapidly, and a more effective infrastructure was created. The society also developed a new mentality, as well as a new class – the entrepreneurs.
3) The third stage, the take off, was the most crucial for further development. It was during this period, covering only a few decades, that the last obstacles to economic development were removed. The most characteristic sign of having reached the take off stage was that the share of net investment and saving in national income rose from 5 percent to ten percent  or more, resulting in a process of industrialization, where certain sectors assumed a leading role. Modern technology was disseminated from the leading sectors while the economy moved towards the stage of maturity. The economic structure changed continuously; certain industries stagnated while new ones were created.    
4.) The state of maturity was gradually reached – as was the ultimate goal, the mass consumption society.
5) Reaching to mass consumption society, the citizens could now satisfy more than their basic needs, and consumption was shifted towards durable goods and services.
According to Rostow, international relations did, in fact, speed up the process of development, but had little to do with underdevelopment. Rostow differed from the early development theorists by his much broader approach (he saw his theory as an alternative to the Marxist theory), but the key element in his thinking was, the process of capital formation.




Mainstreams of economic theory according to historical periods (Development Economics—Structuralist approach: Raul Prebisch)

Outline: Background, Areas of economic concern: Trade theory, Characteristics of development economics, end notes.

Areas of economic concern: Trade theory: After World War II, a coherent Latin American perspective on the development process was formulated in the United Nations Economic Commissions for Latin America (ECLA). The ECLA found that conventional (classical & neoclassical) economic theory, especially comparative advantage & trade theories, favored the industrial countries at the center of a divided global system over the agricultural countries at the periphery of the world, and conclude that conventional theory was inadequate for the underdeveloped world. The ECLA argued that appreciation of the different historical context and natural situations of these countries, their different social structures, types of behavior, and economics require a new structuralist  perspective. The main tenets of this theory were outlined by Raul Prebisch, head of the Central Bank of Argentina.    

Raul Prebisch saw the world not in monoeconomic terms, as one homogenous system, but as two distinct areas, a center of economic power in Europe and the United States, and a periphery of weak countries in Latin America, Africa, and Asia. Conventional economic theory (comparative advantage) argued that the exchange of the central area’s industrial goods for the peripheral area’s primary goods was to the periphery’s advantage. Technical progress in the center would lead to lower prices for industrial exports, so that a unit of primary exports would buy more units of industrial imports . In other words, over the long term progress would accrue to the periphery, without it becoming industrialized. Instead Prebisch argued that Latin America’s peripheral position and primary exports were the causes of its lack of progress specially because of a long term decline in the periphery’s term of trade (the ratio between the value of exports and the value of imports).

Britain as a case study, Prebisch showed that, the terms of trade for center countries had improved with industrialization, from which he concluded that those of the periphery must have deteriorated. Technical advance benefited the center countries rather than the entire world. This was not a temporary phenomenon, but structural characteristics of the global system. Conventional economic theory failed to work because:
1. markets in the center were characteristics by imperfect competition and price reductions could be avoided, while competition among primary producers reduced the prices for their goods; and 2. the income elasticity of demand (i.e., the degree to which demand changes with a given change in income) is higher for industrial than for primary goods, so that the periphery’s terms of trade tended to decline from the demand side.        
Prebisch conclude that Latin America’s underdevelopment was due to its emphasis on primary exports. The solution lay in structural change; industrialization using an import substitution strategy (that is replacing industrial imports with domestic production, under the cover of tariff protection), using income from primary exports to pay for imports of capital goods, state supervision of industrialization, and paradoxically the enlistment of foreign companies to help local businesses. This approach was widely adopted in Latin America and eventually elsewhere in the Third World, at first with impressive results as industry grew rapidly. Over time, however import substitution(to make countries less dependent on foreign manufactures) was associated with high –cost, low- quality industrial output, the economically damaging neglect of agriculture, and positions for foreign capital. In time the remedy came to be seen as the cause of the illness.

Characteristics of development economics
The development economics that emerged in the 1950s was different from neo classical and Keynesian economics because of their specific focus on developing countries and their greater practically in terms of a more immediate policy orientation. At first development economics assumed that economic processes in developing economics assumed that economic processes in developing countries were distinct from those in developing countries, as the structuralist argued, but gradually mono economics (the position that all economies work in similar ways and that neoclassical economics was universally applicable) was reestablished, although “getting the prices right” was acknowledged to be more difficult in the developing world. Also, while population, technology, institutions, and entrepreneurship were exogenous (assumed to be outside the system) in neoclassical economics, they were endogenous (within the system) for development economics, indeed these were often the main factors requiring economic explanation. The position of development economics eventually became not that neoclassical economics was inapplicable, but that it needed extending, for example, to problems of income distribution, poverty, and basic needs, or that growth economics needed modifying because the unemployment problem was not of the Keyesian variety. The result was a hybrid development economics, a mélange of ideas, part structuralist, part neo classical, part Keynesian, part pragmatic. Some of the leading positions of development economics were as follows:
1. Dualistic development
2. Mobilizing domestic resources
3. Mobilizing foreign resources
4. Industrialization strategy
5. Agricultural strategy
6. Trade strategy
7. Human resource development
8. Project appraisal
9. Development planning and policy makfging                                        



Mainstreams of economic theory according to historical periods
Counterrevolution in Development Economics

The counterrevolution in development theory, which is a part of neoliberal or even conservative reaction, opposed Keynesianism, structuralism and radical theories like dependency in the name of renewed faith in classical, Smithian economics.  The counterrevolution in development economics begun when the University of Chicago economist Harry Johnson criticized the Keynesian economics in the early 1970s.  Johnson thought that intellectual movements in economics responded to social needs rather arising from an autonomous scientific dynamic. The secret of the success of Keynesianism resided in its promise to end mass unemployment. According Johnson, the great depression  of the 1930s had resulted from the coincidence of several different national problems. Keynes’s conclusion that capitalism tended systematically to produce massive economic problems (stagnation, unemployment) was unjustifiably critical of an entire system. Economic policy founded on Keynesian ideas displayed a similar lack of confidence in capitalism. For Johnson, for further development, economist erred in adopting industrialization and national self sufficiency as prime policy objectives, with economic planning as their instrument. This led to unproductive industrial investments in developing countries, especially those of post independence Africa; encouraged corruption; favored import substitution which in turn lead to balance of payment problems; and in general misguided intervention into economic life in futile attempts at achieving social justice. According to Jhonson problems in the developing countries came not from the legacy of colonial history, nor from the global inequalities, but from misguided Keyesian development policies. Later, Johnson extended this critique to the Harrod-Domar model’s “concentration on fixed capital investment as the prime economic mover”. Johnson argued that a neglect by Keynesian policy makers of the possibilities of technical progress, and their mesmarization by problems of disguised unemployment, especially in rural areas led to development policies that merely transferred into procductive resources into industrial production, with no economic gain.      

Neoliberalism: Deepak Lal & Bela Balassa
Beginning in the late 1960s, a new economics, opposed to Keynesianism, structuralism, and development economics alike, begun to receive greater attention and adherence, particularly in Britain and the United States. Neo liberal economics came from three linked sources:
i) the monetarist economics of Milton Friedman, argued that macroeconomic problems like inflation and indebtedness derived from excessive government spending driving up the quantity of money circulating in a society;
ii) Economist Friedrich Von Hayek, who argued in The Road to Serfdom that even dalliance with “ Socialist ideas” (like Keyensian planning) would lead to disaster and classical Smithian Ricardian economic principles should be relied on instead; and
iii)      Conservative political and economic ideas glorifying laissez-fair and rugged individualism,  
      Propagated by authors like Ayn Rand.
These ideas began to be taken seriously again in a context of economic crises. Many economists began saying that Keynesian economics was finished, that planning had been found lacking. Neoliberal economic policies were put into effect by the conservative Reagan and Thatcher governments in early 1980s.

Neoliberalism & Deepak Lal
The counterrevolution specifically in development economics was extended by Deepak Lal, an economist at the University of California, Los Angels & Bela Balassa, professor of Political economy at Johns Hopkins University. Lal argued that, the demise of development economics would promote the economic health of the economies (and economics)of developing countries. Development economics, Lal said, had perverted standard economic principles, such as the efficiency of price mechanisms or free trade, in the belief that developing countries were special cases rather than examples of universal rational behavior. He argued that the fundamental the fundamentals of growth in the developed countries applied equally to the developing countries (the position of monoeconomics). Development economics had misinterpreted welfare economics, in particular the “second best theorem,” to produce situations worse than laissez- faire would yield. In a necessarily imperfect world, imperfect market mechanisms would do better in practice than imperfect planning mechanisms. On the grounds of individuals liberty, Lal argued against income redistribution  from rich to poor people On standered, classical economic growth,        
     Lal was against all economic controls or government interventions and for liberalizing financial    and trade controls in a return to nearly free trade regimes.
Bela Balasa
Lal’s ideas were complemented by the work of Bela Balasa on commercial policy in developing countries. For Balassa free trade did not mean the total absence of government intervention, nor complete acceptance of the pattern of production dictated by freely operating world market forces. There were permissible government interventions, such as state protection of infant industries, and indeed choice of policy was key to understanding developmental success. Balassa argued for a stage theory emphasizing the choice of economic policy in setting a course and pushing a country through historical phases of industrialization. Industrial development was said to begin in Thirld World countries as a response to the needs of the primary sector (processing raw materials, providing simple inputs, etc.). Subsequently, a first or easy stage of import substitution entail the local manufacture of previously imported nondurable goods. These industries were conducted at a small scale and required unskilled labor but provided rapid growth as tarrifs on imports enabled local production to gain increasing shares of the market. With the completion of improper substitution further growth was confined to (small) increases in local consumption. Maintaining high rates of growth entailed either second – stage  import substitution – the replacement if imports of intermediate goods (petrochemicals, steel), producer durable (machinery), and consumer durables(automobiles) by domestic production- was undertaken in the post- World war  II period by the Latin American countries, some South Asian countries and East Asian countries. Problems such as the small size of the market led to the need for considerable state protection. In several underdeveloped countries the cost of protection amounted to 6 or 7% of the GDP. Balassa found that economic growth was distorted in environments protected from outside competition, that agriculture suffered, and that countries following this strategy lagged behind. This led to policy reforms like reductions in import protection and subsidization of exports.  Exports – oriented policies, which departed leastfrom a neutral state of non intervention, were adopted by Japan in the mid- 1950s, Korea, Singapore, and Taiwan in the early 1960s. and the Latin American countries in the mid- to late 1960s.  Korea, Singapore, and Taiwan all of which implemented “ free trade regimes” (exporters could choose to use local or imported inputes in thir manufacturing), increased industrial exports rapidly in the early 1960s. In the late 1960s and early 1970s various incentives for exporting in these countries led to further  growth in manufacturing employment and higher incomes. Countries in Latin America (e.g., Brazil) that reformed thir system of incentives also experienced (somewhat lower) rates of increase in exports and employment. But countries that retained inward looking strategies (e. g., India, Chile, Uruguay) remained at the bottom of the industrial growth chart. For Balassa the evidence was conclusive: “Countries applying outward – oriented development strategies had a superior performance in terms of exports, economic growth, and employment where as countries which continued inward orientation encountered increasing economic difficulties. Balassa argued that East Asian countries with high educational levels would replace Japan in exporting skill- intensive production, and that countries at lower stages of industrial development to would export products requiring unskilled labor . This would widen the circle of industrial development to eventually include all. The basic idea now emerged was that the new industrial  countries (NICs) were models for the rest of the developing world to tfollow.

In the mid 1980s a new wave of industrialization in Indonesia, Malaysia, Thailand and (later) China seemed to confirm the Balassa theory of an ever-widening circle of industry – led growth. Neo liberal development theorists argued that “ Growth and development in the NICs are viewed as natyral, inherent properties of open capitalist economics in which market forces are allowed to operate with little state interference.    




Mainstreams of economic theory according to historical periods (Dependency Theory: Frank’s Notions)

Dependency Theory: Marxism forms the philosophical and theoretical basis for a range of neo-Marxist theories that combine materialist notions with a number of other critical traditions; examples most obviously include dependency and world systems theories, but also neo structural notions, like regulation theory. The basic message of the dependency school was that European development was predicated on the active underdevelopment of the non-European world. For dependency theorists, Europe’s development was based on external destruction: brutal conquest, colonial control, and the stripping of Non-Western societies of their peoples, resources, and surpluses. From historical processes like these came a new global geography of European first World center and non-European Third World periphery. The relationship between center and periphery assumed for the Brazilian geographer Dos Santos(1970), the spatial form of dependence, in which some countries (the dominant) achieved self-sustaining economic growth, while others (the dominated and dependent) grew only as a reflection of changes in the dominant countries.

 Background: The incorporation of Latin America into the capitalist world economy, directly through (Spanish and Portuguese) colonial administration, but more subtly through foreign trade, geared the region’s economies toward demands from the center, even when the export economy was locally owned. Dependence skewed the region’s social structure so that local power was held by a small ruling class that used the gains from exporting for luxury consumption rather than investment. Real power was exercised from external centers of command in dominant (“metro politan”) countries. Dependence continues into the present through international ownership of the region’s most dynamic sectors, multination corporate control over technology, and payments of royalties, interest, and profits.

Source: The theory behind the dependency position came from two main sources.

Ist Source: In the United States a school of neo-Marxist thought centered on the socialist journal Monthly Review developed a theory of “monopoly capitalism” to refer to the dominant form of social  organization in the twentieth century. Beginning in the late nineteenth century, large corporations increasingly took over, or out competed, small companies. Monopolization controlled competition, corporations accumulated surpluses from excess profits, and capitalist economics accumulated surpluses from excess profits, and capitalist economics tended toward under consumption and economic stagnation. Economic crises were avoided by stimulation individual demand through advertising and collective consumption through the growth of the military-industrial –industrial complex. Paul Baran and Pal Sweezy  (1966), leading lights of the Monthly Review School, found this an irrational kind of development. Genuine development could be achieved, they  argued, only by withdrawing from the world capitalist system and reconstructing economy and society on a socialist basis.
2nd Source: The second main source for the Dependency School was critical radical economists in Latin America. The ideas of the Economic commission for Latin America (ECLA) and Raul Prebisch (discussed in Chapter 3) were criticized by the Latin American left for ignoring class relations. State intervention in the economy, such as the protection of infant industries could end up subsidizing the profits of the local bourgeoisie, with consumers paying higher prices (at one time the tariff on refrigerators imported into Mexico was 800%). A more radical dependentista position was pieced together by writers such as osvaldo sunkel (1972), Celso Furtado (1963), Fernando Cardoso and Enzo Falleto (1979), and Teontonio Dos Santos (1970), and Popularized in the English-speaking world through the writhing of Andre Gunder Frandk.

Andre Gunder Frandk & his notions on dependency theory:
Frank was a leading critic of development economics and modernization theory. He mounted a detailed criticism of the “ dual society” thesis, which maintained that underdeveloped societies had a dual structure of traditional and modern sectors, each with its own dynamic (see Chapters 2 and 3). For frank, attributing underdevelopment to traditionalism (or feudalism) rather than to capitalism was a historical and political mistake. World capitalism destroyed or transformed earlier social systems even as it came into existence, converting them into sources of its own further development. For Frank, the economic, political, social, and cultural institutions of the underdeveloped countries resulted from the penetration of capitalism, rather than being original or traditional. Frank focused on the metropole-satellite (or center periphery) relations he found typical of Latin America. The underdevelopment of   peripheral- capitalist regions and people, he said, was characterized by three contradictions.

Three contradictions are:
i)The contradictions of the monopolistic expropriation of economic surplus;
ii) The contradiction of metropolis - satellite  polarization;
iii)The contradiction of continuity in change.

Drawing on Marxist analyses of the class expropriation of surplus value (i), especially Baran’s (1960) version, which emphasized the potential surplus that could be made available for investment under non capitalist circumstances. Frank argued that external monopoly resulted in the expropriation  (and thus local unavailability) of a significant part of the economic surplus produced in Latin America. The region was actively underdeveloped (made less developed) by the expropriation of its surplus product (the source’ of investment capital in Marxist theory). Using a case study of Chile, Frank described the pattern of surplus movement as  massive, geographical expropriation system the most remote corners of the region:

The monopoly capitalist structure and the surplus expropriation/appropriation contradiction run through the entire Chilean economy, past and present. Indeed, it is this exploitative relation which in chain-like fashion extends the link between the capitalist world and national metabolizes to the regional centers (part of whose surplus they appropriate), and from these to local centers, and so on to large landowners or merchants who expropriate surplus from small peasants or tenants, and sometimes even from these latter to landless laborers exploited by them in turn. At each step along the way, the relatively few capitalists above exercise monopoly power over the many below, expropriating some or all of their economic surplus -------- Thus at each point, the international, national , and local capitalist system generates economic development for the few and underdevelopment for the many.

This idea of surplus transfer (ii) over space was further developed in Frank’s Second contradiction, whereby center and periphery become increasingly polarized as capitalism developed the one and underdeveloped the other in a single historical process. In this perspective, only a weaker or lesser degree of metropole satellite relations allowed a third to Frank the continuity and ubiquity(iii) of structural underdevelopment throughout the expansion of the capitalist system.

From this perspective on  underdevelopment, Frank, generated more specific hypotheses that could be used in guiding development theory and policy. In contrast to the development of the world metropolis, which was satellite to no other region, the development of national and regional metropolises was limited by their satellite status. For example, local metropolis such as Sao Paulo, Brazil, or Buenos Aires, Argentina, could only achieve a dependent form of industrialization. Real development thus entailed separation and autonomy from the global capitalist system. Similarly, in a hypothesis directly opposed to the finding of modernization geography, that development was spread through contract with the metropolis. Frank hypothesized that the satellites experienced their greatest development when ties to the metropolis were weakest historically during wars, geographically in terms of spatial isolation. By extension, regions that had the closest ties to the metropolis in the past were most underdeveloped in the present. Frank found this thesis confirmed by the “ultraunderdevelopment” of the sugar-exporting regions of northeastern Brazil and the mining regions of Bolivia. In summary, underdevelopment in frank’s theory was not an original condition, nor the result of archaic institutions surviving in isolated regions, nor even did it come from Third World irrationalism. Underdevelopment was generated by the same processes that developed the center; in particular, underdevelopment in the periphery resulted from the loss of surplus that was expropriated for investment in the center’s development (Frank 1969b, 1979).

Limitations: An immediately noticeable weakness in Frank’s theory resided in its failure to specify the economics of surplus extraction. In some cases the mechanisms of surplus extraction were obvious-for example, when European, north American, or Japanese corporations owned land and factories in Latin American countries and withdrew surplus as rent or profit, when center banks loaned capital to peripheral states and enterprises and withdrew surplus as interest. But what of peasant producers, owning their own land, and producing cash crops for export to center markets, a situation typical of much of the peripheral agriculture in the nineteenth and twentieth centuries ? here the beginning of an answer was provided by Arghiri Emmanuel (1972; see also deJanvry 1981) with the theory of unequal exchange. Like the ECLA economists, Emmanuel argued against neoclassical trade theory, which said that the international division of labor and system of trade had advantage for all participants (see chapter 2). Emmanuel argued instead that international division of labor  and system of trade had advantages for all participants (see (chapter 2) Emmanuel argued instead that international trade made poor countries poorer and rich countries richer. Emmanuel assumed the perfect international mobility of capital, but the immobility of  labor between countries ; hence wage rates persistently differed greatly between the two. Peripheral countries exported agricultural  products that embodied large quantities of cheap labor and imported industrial products that embodied small amounts of expensive labor. This led to terms of trade favoring the higher cost products of the center, while devaluing the lower cost exports of the periphery. Peripheral countries were prevented from achieving development because they sold their goods at prices below values (the socially necessary labor embodied in the products), while rich countries sold goods at prices above values. For Emmanuel, unequal exchange (through trade) was a hidden mechanism of surplus extraction and a major cause of the economic stagnation in the periphery. Samir Amin (1976: 143-144), director of Forum Tiers Monde in Dakar, Senegal, estimated the amount of surplus transferred from poor to rich countries, but 15% of that of the poor countries, an amount, he thought, that was “sufficient to account for the blocking of the growth of the periphery.” From the perspective  of dependency the theory, the peripheral countries borrowed back their own surplus to finance “development schemes” The geopolitical implications of this theory were explosive !
Yet, there were other, more serious, criticisms of Frank. The Brazilian economist Fernando Cardoso (1982) found the notion of the development of underdevelopment a neat play on words, but not helpful in concrete terms. In Latin America, he argued, multination  corporations invested in modern industrialization, while supposedly traditional sectors (agriculture, mining) operated in technically and organizationally sophisticated ways, and both were parts of an advanced but dependent capitalist development. However he added that in countries like Argentina, Brazil, and Mexico Spatial and sect oral  dualism emerged, composed of advanced economies tied to the international capitalist system, and backward sectors, or internal colonies. Multinational corporations were interested in at least some prosperity for dependent countries because of the markets this prosperity provided. But the Latin American countries remained dependent for technology on the United States. In contrast to frank’s universalism, Cardoso advocated looking closely at specific situations in particular parts of the Third World, where development and dependence could be found exiting in tandem. We might note that on becoming president of Brazil in 1994, Cardoso adopted a neoliberal development posture directly contrary to his previous dependency views.
Dependency theory was holistic in that it attempted to place a country into the larger (global) system. In its simple form, it stressed the external causes of underdevelopment rather than those internal to a peripheral society. A strong emphasis was Placed on economic rather than social or cultural interactions. In Franks’s version, the accent was on regions, spaces, and flows, rather than on class, for most theorists, dependency and underdevelopment were synonymous, although Cardoso, for example, thought that dependent forms of capitalist development could be achieved. And finally, dependency theory was politically radical, with most of its adherents proclaiming the need for some kind of socialist revolution, although a purely nationalist politics (merely cutting a peripheral country off from the world capitalist system so that it could develop autonomously) could also emerge from purely spatial versions of the dependency perspective.



Mainstreams of economic theory according to historical periods (World System Theory-- Immanuel Wallerstein)

World systems theory has obvious affinities with the dependency school. But it had antecedents, too, in a theory of history named after Annales: Economies, Societies, Civilizations, the journal founded in 1929 by French historians Lucian Febvre and Marc Bloch. The Annales School aimed at remaking the discipline of history. Dissatisfied with conventional history because it was isolated and unrealistic, the Annales historians used a comparative method involving long sweeps of time to examine differences and similarities between societies, The French geographer Vidal de la Blache, who believed that genre de vie, or way of life, mediated between people and nature, deciding which of nature’s possibilities came to be used (environmental positivism), was an ally of the school, which always had a strong geographical component in its regional histories, geohistories, and studies of transportation. The main themes of the Annales school were social history, especially of the material conditions of the masses; structural factors, or relative constants; the long term as a common language for the social sciences; and, while this was not a Marxist school of thought, a concern with the relations among economy, society, and civilization. Ferdnand Braudel (1972,1973), the  most famous of the school’s second-generation scholars, was particularly interested in structural limitations on  material and economic life. The great slopes of historical change over centuries, regional histories, and the sudden breakup of ancient ways in the nineteenth century. Of the peoples of the Third World and the sudden changes thrust upon them through contact with the First World.
Notions of Immanuel Wallerstein
A more obvious connection with development theory was forged by a leading English-speaking representative of the Annales School, the sociologist Immanuel Wallerstein of the State University of New York at Binghampton Wallerstein retained the broad spatial scale and long historical time span of Annales scholarship by treating world history as the development of a single system. By “system” Wallerstein meant a social entity with a single division of labor so that all sectors or areas were dependent on the others via interchanges of essential goods. The past was characterized by mini systems, small entities with a complete division of labor and a single cultural framework, as in simple agricultural or hunting and gathering societies. But the recent integration of the hill tribes of Papua New guinea, and the bushmen of the Kalahari into the capitalist world system meant that mini systems no longer existed. World systems, characterized by a single division of labor and multicultural systems have long been dominant. The outstanding example, for Wallerstein, was the capitalist world economy, in which production was for profit and products were sold on the market. In such a system production was constantly expanded, as long as profits could be made, and producers innovated to expand the profit margin; hence the secret of capitalist success was the pursuit of profit. In past, world economies, held together by strong states, were unstable and tended to become world empires, as with China, Egypt, and Rome. Surplus was extracted from peasants using various methods of political coercion. With capitalism, by contrast, power passed to the private owners of means of production, with the state guaranteeing conditions for capital accumulation The capitalist world economy resisted various attempts to create a world empire (e.g, by Britain and the United States), and capitalism has therefore proven to be a lasting way of regulating and coordinating global production (Wallersterin 1979).
Economic Zones within world system
According to wallerstein, within the world system there are there main economic zones: core, semi periphery, and periphery. The core consists of countries with efficient, complex production systems and high levels of capital accumulation. Core states are administratively well organized and militarily powerful. Peripheral countries have the opposite characteristics, while the semi periphery combined elements of both. World systems theory saw spatial relations as exploitative, that is involving the flow of surplus from periphery to core. For world systems theory, most of the surplus accumulated as capital in the core came from local sources (the exploitation of local workers) but the addition of peripheral surplus reduce the level of class and interstate conflict in the core (chase-Dunn 1989). For the periphery, loss of surplus meant that capital needed for modernization was not available, while the system of intense labor exploitation at law wage levels shaped peripheral class relations and fostered political conflict. Semi peripheral states functioned to prevent political polarization in the world system while collecting surplus for transmission to the core (Shannon 1989):  Ch. 2).
For Wallerstein, the capitalist world economy originates in sixteenth-century Europe, an era and place of increased agricultural production for growing urban markets. At the core of the developing world economy in England, the Netherlands, and northern France, a combination of pastoral and arable production required high skill levels and favored free agricultural labor (yeoman farmers). The periphery of the system, in Eastern Europe and increasingly the Americas, specialized in grains, cotton, and sugar together with bullion from mines, all of which favored the use of coerced labor (either a kind of serfdom that wallerstein calls “coerced cash crop labor” or pure slavery). In between lay a series of transitional regions (e.g, northern Italy), mainly former cores degenerating toward peripheral status, marking hish sharecropping in the agricultural arena. Whereas the interests of capitalist landowners and merchants coincided in the development of the absolute monarchy and strong, central state machineries in the core, ruling class interests diverged sharply in the periphery, leading to weak states. Unequal exchange in commerce was imposed by the strong core on the weak peripheries and the surplus of the world economy was thereby appropriated (Wallerstein 1974: Ch. 2 and 3). From this geo sociological perspective, Wallerstein outlined the main stages in the history of the world capitalist economy:
Main stages
1. The European world economy emerged in the “long sixteenth century” (1450-1650). The crisis of feudalism posed a series of dilemma  that could only be resolved through geographic expansion of the division of labor. By the end of the the period  Northwest Europe had established itself as core, Spain and the northern Italian cities declined into the semi periphery, and Northern Europe and Iberian American were the main peripheries of the system.
2. A mercantile struggle during the recession of 1650-1730 left England as the only surviving core state.
3. Industrial production and the demand for raw materials increased rapidly after 1760, leading to geographic expansion of the system, which now became truy a world system uner British hegemony. Russia, and important external system, was incorporated into the semi periphery, while the remaining areas of Latin America and Asia and Africa were absorbed into the periphery. This expansion enabled former areas of the periphery (the United States and Germany) to become semi peripheral, and eventually core states. The core exchanged manufactured goods with the periphery’s agricultural products. The mass of industry created an urban proletariat as internal threat to the stability of the core of the capitalist system which the industrial bourgeoisie eventually had to “buy off” with higher wages. This also solved the problem of what to do with the burgeoning output of manufacturing.
4. World War I marked the beginning of a new state characterized by revolutionary turmoil (the Russian Revolution ended that country’s) further decline toward peripheral status) and the consolidation of the capitalist world economy under the hegemony of the United States. After World War II, the urgent need was expanded markets, which the hegemonic power met by reconstructing Western Europe, reserving Latin America for U.S investment, and decolonizing South Asia, the Middle East, and Africa. Since the Late 1960s a decline in U.S political hegemony has increased  the freedom of action of capitalist enterprise, now in the form of mutational corporation.
The world system thus had structural parts (center, semi periphery.) evolving through stages of alternating expansion and contraction. Within such a framework, wallerstein argued, comparative analyses of the whole system and the development of its regional parts could be made.