Modern Development Theory as Applied to Ancient Economy. - Historum

mansamusa · June 4th, 2012, 06:27 AM

　
Frank J Frost in his book, Greek Society, writes:

Quote:

Some modern economists have estimated that when the amount of venture capital invested by a given community is equivalent to ten percent of the gross national product, that community has reached the economic "take off" point--a theoretical stage after which a mild imflationary spiral makes economic growth self-perpetuating. Nowhere in the Greek world during the classical period did the economy even remotely approach such a stage of development.
Frank J Frost; Greek Society, pg 74; 1992

I would disagree. I believe that beginning with Peisistratus and culminating with Pericles there is distinct possibility that just such a thing was achieved in Ancient Athens. Frank J Frost was here explaining the Big Push Theory as based on the Harrod-Domar Growth Model. Rostow actually describes the Take of stage as Capital investment equalling 15--20% of the GNP as oppossed to Frost's 10%:

http://people.cedarville.edu/employee/wheelerb/macro/ldc_theory/ecn_dev.html

It states that there are certain stages of Development:
1.traditional society
2.transitional stage: the preconditions for take-off
3.take-off
4.drive to maturity
5.high mass consumption

This process would begin with agriculture being developed beyond just subsistence needs, with production for the market. Transportaion and other infrastructure is developed as a result. The take off stage is achieved within the ancient context, when agricultural ouput is large enough to achieve savings that could be translated into more and accelerated investments in capital infrastructure.

I think the most ideal and earliest examples of such a development would be OLd Kingdom Egypt or the Pyramid Age. Large scale construction in the old Kingdom, led to strong centralization of Government. With such huge amounts of labour diverted from agriculture to construction there was increased pressure to increase agriculktural yields, make taxing more efficient, seek for extra labour from abroad etc. The Old Kingdom was a long and sustained process of continual growth.

There is no evidence that an increase in construction led to decrease in Agricultural output or decline in the material welath or the standard of living. It was not a case of one sector being deprived of resources diverted to another sector. As far as I am concerned this is suggestive of the Take Off Stage or selfsustaining growth being achieved in the Old Kingdom.

Furthermore, the Big-Push theory stresses on the importance of government investment as a catalyst for economic development, as opposed to simply relying on the Price Mechanism or free market forces. Such a theory is ideal for the Ancient Economy as the State, in societies as far apart in space and time as Old Kingdom Egypt and Han China always played the defining role in the Ancient Economy.

mansamusa · June 4th, 2012, 06:43 AM

But ofcourse I maybe wrong and naive. But nonetheless am also interested in how the Lewis Dual Sector Model of Development applies to the concept of Ancient Economy. Not least because he is a fellow countryman:

Sir Arthur Lewis, the St. Lucian Nobel Lauraeate, often cited as inventing modern development economic theory.

Quote:

Lewis proposed his dual sector development model in 1954. It was based on the assumption that many LDCs had dual economies with both a traditional agricultural sector and a modern industrial sector. The traditional agricultural sector was assumed to be of a subsistence nature characterised by low productivity, low incomes, low savings and considerable underemployment. The industrial sector was assumed to be technologically advanced with high levels of investment operating in an urban environment.

Lewis suggested that the modern industrial sector would attract workers from the rural areas. Industrial firms, whether private or publicly owned could offer wages that would guarantee a higher quality of life than remaining in the rural areas could provide. Furthermore, as the level of labour productivity was so low in traditional agricultural areas people leaving the rural areas would have virtually no impact on output. Indeed, the amount of food available to the remaining villagers would increase as the same amount of food could be shared amongst fewer people. This might generate a surplus which could them be sold generating income.

Those people that moved away from the villages to the towns would earn increased incomes and this crucially according to Lewis generates more savings. The lack of development was due to a lack of savings and investment. The key to development was to increase savings and investment. Lewis saw the existence of the modern industrial sector as essential if this was to happen. Urban migration from the poor rural areas to the relatively richer industrial urban areas gave workers the opportunities to earn higher incomes and crucially save more providing funds for entrepreneurs to investment.

A growing industrial sector requiring labour provided the incomes that could be spent and saved. This would in itself generate demand and also provide funds for investment. Income generated by the industrial sector was trickling down throughout the economy.
Biz/ed - Lewis's Dual Sector Model of Development [ Biz/ed Virtual Developing Country ] | Biz/ed

Ofcourse we need to make adjustments here to suit our Ancient Economy context. The division would be not between subsistence Agriculture and the industrial sector but instead between subsistence agriculture and agriculture meant for mass consumption of persons emplyed in the non-agricultural sector such as the bureaucrats of the Old Kingdom. The industrial sector would also include the large scale construction sector plus craft manufaturing--ceramic, textiles, weapons, etc produced for mass consumption or even export.

In the context of the Ancient Economy or rather the Old Kingdom, Lewis' industrial sector would effectively mean the sectors of the economy coordinated or controlled immediately by the state bureaucracy. And ofcourse by wages we mean food and other forms of payment such as royal land leases, as the Old Kingdom was non-monetary economy, unlike Athens.

**Guaporense** · June 4th, 2012, 03:37 PM

These theories are now obsolete. Both the lewis model and the quote relative to the ancient greek economy are obsolete, the second in fact because it is a primitivist quote from 1992, when the primitivists dominated the analysis of the ancient economy. There isn't such thing as a "critical point" of capital accumulation. In fact, given agriculture with a yield/seed ratio of 4-5, about 20-25% of the output need to be invested into the next period to maintain current production. Thus, all ancient societies had achieved rates of investment greater than 10%, in fact because of the low yield of the seeds.

There isn't such thing as a "critical point" of take off. Britain, for instance, never had a well defined point of economic takeoff. Per capita income growth gradually accelerated over the centuries, according to the most modern estimates:

British per capita income increased from 670 dollars in the late 13th century to 1,660 dollars in the mid 18th century, further increasing to 3,900 dollars by 1870. So, while per capita income growth really had a jump in the rate of growth in the late 18th century, there wasn't any clear take-off.

Economic growth in Classical Greece was probably at similar rates to the British growth from 1270 to 1750, not approaching the rates of 1750 to 1870. Though isolated cases may have been different: Athens from 500 BC to 430 BC probably achieved very high rates of real income growth, similar to the British rates from 1750 to 1870.

**Guaporense** · June 4th, 2012, 03:42 PM

Modern economic theory on growth is presented in books such as:

Amazon.com: Introduction to Modern Economic Growth (9780691132921): Daron Acemoglu: Books

From 2009. Here you will see that today it is generally considered that real economic growth is driven by innovations. Capital accumulation is not capable of generating economic growth as there are DECREASING RETURNS and therefore the output will tend to converge to a maximum static level.

The Soviet Union tried to achieve economic growth without innovation by free entrepreneurs, just by forced investment promoted by centralized planning. What happened? There was significant growth in the first decades of the "soviet experiment" and after a few decades decreasing returns entered the scene and by the 1970-1991 period, economic growth ground to a halt, later it experienced negative growth.

mansamusa · June 4th, 2012, 04:10 PM

Thanks for the input Guaporense, although I naturally disagree.

mansamusa · June 4th, 2012, 06:06 PM

To understand how the non-monetary economy of the Old Kingdom or even the Middle Kingdom or New Kingdom of Ancient Egypt worked it would be useful to make reference to the economics of the Soviet Union.

The Soviet Union more than anything else represented an economic system which was effective as opposed to efficient. Despite the legendary inefficiencies of the Soviet economy resulting from the lack of a free market economy they achieved a list of great things: rapid industrialization; the first to put man in space; they made remarkable progress in science and human education etc.

These achievements were all the result of a stunning and massive mobilization of resources and capital accumulation which some wish to dismiss as irrelevant. Paul krugman does a wonderful job of explaining the deficiencies of the Soviet economy. Growth and output was based on simply increasing the level of inputs ie, Skilled labour, equipment and capital, as opposed to increasing total factor productivity, which is inproving the quantity of ouput per unit of input by relying on technological innovation:

Quote:

It is a tautology that economic expansion represents the sum of two sources of growth. On one side are increases in "inputs": growth in employment, in the education level of workers, and in the stock of physical capital (machines, buildings, roads, and so on). On the other side are increases in the output per unit of input; such increases may result from better management or better economic policy, but in the long run are primarily due to increases in knowledge.

The basic idea of growth accounting is to give life to this formula by calculating explicit measures of both. The accounting can then tell us how much of growth is due to each input--say, capital as opposed to labor--and how much is due to increased efficiency.

We all do a primitive form of growth accounting every time we talk about labor productivity; in so doing we are implicitly distinguishing between the part of overall national growth due to the growth in the supply of labor and the part due to an increase in the value of goods produced by the average
worker. Increases in labor productivity, however, are not always caused by the increased efficiency of workers. Labor is only one of a number of inputs; workers may produce more, not because they are better managed or have more technological knowledge, but simply because they have better machinery. A man with a bulldozer can dig a ditch faster than one with only a shovel, but he is not more efficient; he just has more capital to work with. The aim of growth accounting is to produce an index that combines all measurable inputs and to measure the rate of growth of national income relative to that index to estimate what is known as "total factor productivity."(2)

So far this may seem like a purely academic exercise. As soon as one starts to think in terms of growth accounting, however, one arrives at a crucial insight about the process of economic growth: sustained growth in a nation's per capita income can only occur if there is a rise in output per unit of input.

Mere increases in inputs, without an increase in the efficiency with which those inputs are used--investing in more machinery and infrastructure--must run into diminishing returns; input-driven growth is inevitably limited.

How, then, have today's advanced nations been able to achieve sustained growth in per capita income over the past 150 years? The answer is that technological advances have led to a continual increase in total factor productivity--a continual rise in national income for each unit of input. In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent.

When economists began to study the growth of the Soviet economy, they did so using the tools of growth accounting. Of course, Soviet data posed some problems. Not only was it hard to piece together usable estimates of output and input (Raymond Powell, a Yale professor, wrote that the job "in many ways resembled an archaeological dig"), but there were philosophical difficulties as well. In a socialist economy one could hardly measure capital input using market returns, so researchers were forced to impute returns based on those in market economies at similar levels of development. Still, when the efforts began, researchers were pretty sure about what: they would find. Just as capitalist growth had been based on growth in both inputs and efficiency, with efficiency the main source of rising per capita income, they expected to find that rapid Soviet growth reflected both rapid input growth and rapid growth in efficiency.

But what they actually found was that Soviet growth was based on rapid--growth in inputs--end of story. The rate of efficiency growth was not only unspectacular, it was well below the rates achieved in Western economies. Indeed, by some estimates, it was virtually nonexistent.(4)

The immense Soviet efforts to mobilize economic resources were hardly news. Stalinist planners had moved millions of workers from farms to cities, pushed millions of women into the labor force and millions of men into longer hours, pursued massive programs of education, and above all plowed an ever-growing proportion of the country's industrial output back into the construction of new factories.

Still, the big surprise was that once one had taken the effects of these more or less measurable inputs into account, there was nothing left to explain. The most shocking thing about Soviet growth was its comprehensibility.

This comprehensibility implied two crucial conclusions. First, claims about the superiority of planned over market economies turned out to be based on a misapprehension. If the Soviet economy had a special strength, it was its ability to mobilize resources, not its ability to use them efficiently. It was obvious to everyone that the Soviet Union in 1960 was much less efficient than the United States. The surprise was that it showed no signs of closing the gap.

Second, because input-driven growth is an inherently limited process, Soviet growth was virtually certain to slow down. Long before the slowing of Soviet growth became obvious, it was predicted on the basis of growth accounting. (Economists did not predict the implosion of the Soviet economy a generation later, but that is a whole different problem.)
http://media.ft.com/cms/b8268ffe-7572-11db-aea1-0000779e2340.pdf

Based on the fact that Ancient Economy was not well known for its efficiency, we can easily class it as belonging to the same category as Soviet Style growth. Growth based on massive increase in inputs as oppossed to increased innovation. The irrigation technology of Ancient Egypt for instance remained relatively primitive.

In the case of classical Greece so called industry were very small affairs. The largest industrial complex recorded in Ancient Greece was by the family of Lysias at the end of the 5th century at Piraeus who owned a shield factory that had an inventory of 700 shields. Also in Classical Greece industry and business was based on slavery which is far from efficient.

And indeed the most impressive periods of Growth in Classical Greece was marked by heavy investment in capital infratructure by the state as exemplified by Peisistratus and Pericles. The same thing is true or even more true of Ancient Egypt where the state was completely incharge of the economy. In Athens, the state would hire out its building contracts to private contractors, whereas in Egypt building construction would have been a wholly state or bureucratic affair.

So in the Ancient Economy we are left with the situation where Growth was largely a result of mobilization of resources by the state, especially capital accumulation of the sort achieved by the Old Kingdom, as opposed to increases in efficiency. In other words the ancient economy, at its best, was an effective , not efficient economy.

mansamusa · June 5th, 2012, 04:01 AM

Quote:

Originally Posted by Guaporense

These theories are now obsolete. Both the lewis model and the quote relative to the ancient greek economy are obsolete, the second in fact because it is a primitivist quote from 1992, when the primitivists dominated the analysis of the ancient economy. There isn't such thing as a "critical point" of capital accumulation. In fact, given agriculture with a yield/seed ratio of 4-5, about 20-25% of the output need to be invested into the next period to maintain current production. Thus, all ancient societies had achieved rates of investment greater than 10%, in fact because of the low yield of the seeds.

You misunderstand the Development Models. The models are far from flawless in that they assume rationality and perfect information. However they do go a long way in giving a general understanding of how development processses work.

And about your point on yield--seed ratio. It does not matter if such a thing is true. 20--25% of output being used to maintain current production does not fulfill the model of Rostow, as long as current production remains on a subsistence level. Conditions would fit the model only if surplus agricultural output is achieved, and if that output goes towards mass consumption or consumption by non-farmers.

Quote:

Originally Posted by Guaporense

There isn't such thing as a "critical point" of take off. Britain, for instance, never had a well defined point of economic takeoff. Per capita income growth gradually accelerated over the centuries, according to the most modern estimates:

British per capita income increased from 670 dollars in the late 13th century to 1,660 dollars in the mid 18th century, further increasing to 3,900 dollars by 1870. So, while per capita income growth really had a jump in the rate of growth in the late 18th century, there wasn't any clear take-off.

The Harrod-Domar growth model posits that the rate of growth is determined jointly by the national savings ratio and national capital to output ratio. The more a nation can save and invest the quicker it can grow. Your figures on Britain simply suggest that over the centuries , the British simply saved more and invested more, ensuring their growth. How does that disprove the model?The critical point of take off should be understood as a phenomenon that applies to specific point in time where subsistence Agriculture is the defining mode of economic production.

I imagine the major advantage they would have over Japan was their mercantilist exploitation of the New World after its discovery in 1492, which would make available additional investments from exploitive trade and coloniallist exploitation. Although that does not explain the period 1280 to 1450. I think depopulation as result of the plague led to higher per capita income during that phase.

Quote:

Originally Posted by Guaporense

Economic growth in Classical Greece was probably at similar rates to the British growth from 1270 to 1750, not approaching the rates of 1750 to 1870. Though isolated cases may have been different: Athens from 500 BC to 430 BC probably achieved very high rates of real income growth, similar to the British rates from 1750 to 1870.

What do you imagine was responsible for the phenomenal growth in Classical Greece --I mean apart from massive mobilization of resources and capital accumulation--coodinated by the state?