On Economic Growth and Development

There exist disagreements about the role economic growth plays in socio-economic development. Among economists, a divide exists between those who consider economic growth to be a necessary condition for economic development and those who do not. This blog post tackles this issue from the perspective of the ‘surplus approach’, an approach embedded in the works of economists such as Adam Smith, David Ricardo and Karl Marx, and revived and improved in the 20th century notably by Piero Sraffa and Pierangelo Garegnani. For our purposes, it is enough to focus on the concept of the social surplus.

Deducting necessary expenses (subsistence wages, raw material costs and depreciation) from the annual gross product of an economy leaves us with the surplus. In the work of classical economists, this surplus consisted of profits and rents. Wages could also contain a ‘surplus’ element when the economy is growing or when collective bargaining favours the working class. Most importantly, the surplus could be utilised freely (or for any purpose) without it affecting the ability of the economy to reproduce itself. Of course, for the economy to grow, some of that surplus will have to be reinvested. This reinvestment of a part of the surplus results in an expansion of productive capacity. When this expansion in productive capacity is matched by an equivalent aggregate demand, there will be economic growth.

In physical terms, the volume of the surplus depends on the methods of production in use and the magnitude of subsistence wages. The methods of production specify how much of output can be produced with a certain combination of inputs (given by the technical know-how and blue prints available with the firms). (To use marginalist terminology, the production function in classical economics is of fixed-coefficients; that is, labour and ‘capital’ cannot be substituted for each other such that the same commodity is produced.)

Leaving rent aside, the distribution of the surplus between capitalists and workers will depend on the strength of the labour unions and other labour market conditions. For instance, in India, it will also depend on the gender and caste determinants. Also, the distribution will vary depending on whether the firm is formal or informal. There exist sectors where productivity gains entirely accrue to the capitalists. Whereas, the distribution of the surplus between private individuals (both workers and capitalists) and the government depends on the prevailing income and corporate tax structure.

The surplus, as mentioned previously, can be used for reinvestment (to produce capital goods) or for luxury consumption (in the production of non-capital goods). Also, the surplus can accrue as taxes to the government. And we have seen that if the surplus is reinvested, there will be economic growth as long as there is adequate aggregate demand. How much of economic growth is good’ Are all kinds of economic growth desirable’ Are all kinds of economic growth sustainable’ By ‘kinds of economic growth’, we refer to several combinations ‘ driven by agriculture; service-led; consumption-driven; debt-induced; foreign trade-driven; or productivity-driven. These issues will not be addressed in this blog post. More precisely, we do not examine the difficulties associated with any of these drivers of growth.

So far, we have not discussed development. Let us define economic development to be the rise in the standard of living of the people in an economy/nation state. An overall increase in real incomes is necessary for an overall improvement in the standard of living. If all workers and capitalists have sufficient (real) incomes to access their as well as their dependents’ educational needs, health needs besides the basic needs of ‘decent’ food, shelter and clothing, we can safely say that the economy is ‘developed’. In an economy where workers do not have sufficient (real) incomes and/or there are socio-cultural impediments to access/consume any of their needs, development needs to take place.

What is the source of (economic) development’ There has to be monetary resources available to build the lacking infrastructure or to directly import them where possible. One of the means of generating such resources is through economic growth. But, generating a surplus is clearly not sufficient. The manner in which the surplus is distributed among workers and capitalists as well as redistributed by the government is extremely crucial. There is no predefined way of going about this. It is determined by wider social, cultural and political factors. For example, if trees are felled during the creation of infrastructure, some of the surplus can go towards planting new trees. Or, some of the surplus accruing to the capitalists can be reinvested for improving the working conditions. The important point to note is that there are no automatic mechanisms which ensure such allocations. The market has no such interests or objectives. In short, the decision of ‘development’ is primarily undertaken in the socio-political arena. And, as long as we aspire for better standards of living, economic growth is necessary so that it generates adequate monetary resources in order that our aspirations may be met. But, yes, economic growth by itself cannot guarantee or ensure development.

On Property Rights and Economic Development

India is ranked 46th alongside Costa Rica, Kuwait and Slovenia. Finland has secured the first rank and Bangaldesh is given the last rank in the IPRI 2009 report.

Property rights is an issue that all scientists, social scientists and others have had to think about directly or indirectly in their lives. It is property rights that we are talking about when a new product is introduced, a new book is released, two siblings fight over their father’s property, people are displaced from land which they had considered to be their own, prime agricultural land is handed over to giant companies, etc. This post questions the notion that property rights ’causes’ economic development by focusing attention on the International Property Rights Index (IPRI) 2009 report.

The 2009 IPRI shows that economic growth is intimately related to ownership. Such a statement is derived from a positive correlation that is seen to exist between a country’s protection of both physical and intellectual property rights and its economic well-being. In order to analyse this claim, the post looks at concepts such as economic growth, ownership and correlation.

Property rights is considered to be fundamental to all human rights. Of course, lack of property rights makes governance difficult and also makes business cumbersome. But, one needs to understand the history of ‘property rights’ or ‘ownership’. This is where Karl Marx can aid us. It is the forced separation of the labourer from his means of production that led to the emergence of ‘private property’. In Das Kapital Volume I, Marx talks of the brutal and coercive policies that were carried out so as to divorce workers from their land. This is a section which all students who are concerned about property rights must read.

Economic Growth
There is an increasing tendency to equate economic growth with economic well being. Though, very often rates of economic growth surge without any ‘real’ improvement in the livelihood of the populace. Economic growth is to be understood as the rate of growth of GDP in a country over a period of time. At times, per capita GDP is used in the calculation. Which ever definition is used, one must always keep in mind that they are only statistical indicators, which are arrived at on the basis of a lot of assumptions. This is not to say that such indicators are useless or meaningless, but rather to emphasise their power in framing policies. Hence, the need to use them with utmost caution.


It is alarming when correlation analysis provides ‘scientific support’ to causation. Such instances are in plenty within the discipline of Economics. Economics as a discipline tries to identify cause and effects so that appropriate policies can be framed. But, causation is a philosophically challenging concept. Philosophers still grapple with it and will continue to do so. However, economists seem happy to be talking about causes and effects by making use of just correlation!

Positive correlation between IPRI and GDP per capita
Source: IPRI 2009 Report

How can one conclusively establish that it is property rights which leads to high GDP per capita’ Couldn’t it be possible that it is the high per capita GDP that is resulting in stronger property rights’ Is it is on the basis of statistical correlation that property rights are considered to be a significant factor for economic growth’