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The Other Canon

Reconstructing the Theory of Uneven Economic Development

In most academic disciplines the canonical texts - those containing the 'truth' - are periodically revised. Economics, however, is almost totally unaffected by such revisionism. A fundamental problem of the ruling canon in economics has been that it essentially lacks a theory of economic development beyond seeing it as a process of adding capital to labour. The theory rests on what Schumpeter once called 'the pedestrian view that capital per se propels the capitalist engine'. There is an obvious connection between the lack of a theory of development as such and the lack of a theory of why the process of development is uneven. Recent economic models incorporating new factors and producing uneven growth have - mostly at the insistence of their authors - been barred from practical use in economic policy.

19th Century critics of the classical school of economics referred to it as catallactics, a theory of exchange rather than a theory of production. Still the theoretical focus of the profession is on Man the Consumer rather than on Man the Producer. This project aims to resurrect the alternative and production-based canon of economics - The Other Canon - which dates back to the pre-mechanical Weltanschauung of the Renaissance. A key feature of this theory is that it explains why economic development is uneven. The practical uses of The Other Canon lie in the economic policy both in the First, Second and Third Worlds.

The challenge to theory and policy.
At the turn of the Millennium, the world faces social problems of increasing magnitude. During the 1990's, the majority of the world's nations have experienced falling real wages - in many cases real wages have declined both rapidly and considerably. In the former communist countries a human crisis of large proportions is emerging. These events profoundly challenge the present world economic order - the Washington Consensus - and the standard textbook economics on which this order rests.

The European welfare states are also facing new challenges. The main features of the economic policy of these nations have been an active Keynesian demand policy and a strong hands-on policy in the labour markets, combined with a laissez-faire policy as regards industrial structure. In a period of fundamental technological change, a new strategy is needed. By continuing their focus on demand management, labour markets and income distribution, these nations fail to confront the structural problems arising from the evolving new techno-economic paradigm.

The present change in the technological basis for growth creates mismatches between the traditional welfare state - its institutional structure, educational priorities, tax policy and industrial policy - and the conditions under which the new economic activities have shown to be thriving. At the same time traditional industry is experiencing the same type of development that characterised agriculture under Fordist mass production: New technology creates process innovations in mature markets, leading to a rapid fall in employment and fierce price competition. The welfare states must now focus on building economic activities in new industries facing product innovations in growing markets and Schumpeterian competition (on product differentiation and quality).

Presently the stakes are higher for all nations than they have been for a long time. The increasingly globalised economy seems to produce opposite effects of what standard economic theory predicts. Instead of a convergence of world income (towards factor-price equalisation), we find that while the rich nations enjoy sustained growth, ninety of the world's nations were poorer in 1997 than in 1990. Thirty-seven of these nations were poorer in 1997 than they were in 1970. Poverty and disease increase sharply in Sub-Saharan Africa, and we see a creeping 'Africanisation' in parts of Latin America.

According to a 1999 Report from UN Development Programme - 'Transition 1999' - a 'human crisis of monumental proportions is emerging in the former Soviet Union'. The transition years 'have literally been lethal for a great many people'. In Russia both GDP per capita and industrial production have been reduced by about 50 per cent since the fall of the Berlin wall. The biggest single cost has been the loss of lives among young and middle-aged men. According to the report there are nearly 9,7 million "missing men" in the transition economies as a whole. We are witnessing an outcome no one would have predicted: Notoriously inefficient command economies were able to produce considerably higher standards of living than do free market policies constructed on the textbook economics of the 1990's

Financial liberalisation is accompanied by severe crisis in financial markets. At the institutional level we are witnessing the collapse of civil society and of the state in many developing countries. Even in the wealthiest nations we observe a deterioration of basic services such as health and education. At the same time, governments are grappling with an inadequate theoretical framework, attempting to adjust economic policy and the institutional framework in order to cope with disruptive and discontinuous technical and social change.


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