Pope Francis has been in the news recently with his encyclical on climate change, but did you know that the Catholic Church helped to shape modern economic theory? When the Second Vatican Council was reconvened in September 1963 following the death of Pope John XXIII, it was asked to “start a dialogue with the contemporary world”. In October, the Pontifical Academy of Science invited 17 experts to “gather together the latest results of a new branch of science, econometry, and to present them to political economists in order to aid them in formulating those plans for a more stable security and for greater development which can contribute so much to the well-being and peace of nations.” Seven of the 17 would go on to become Nobel Laureates, and during that study week at the Vatican one of them, Tjalling Koopmans, outlined the mathematical foundations for the kind of economic growth theory that still dominates current orthodoxy.
Unfortunately, although Koopmans had revived a tradition underpinned by ethical and political considerations of intergenerational issues, initiated by Frank Ramsey in 1928, growth theory became formal and narrowly technical. By cutting itself adrift from the moral sciences, it became devoid of philosophical, epistemological and ontological significance. Hence, to the extent that any theory of development was underpinned by growth theory, it shared these deficiencies. More importantly, from an epistemological point of view – and, perhaps, also methodological – the uncertain, undecidable, complex, incomplete, unsolvable dimensions of development theory and policy were short-circuited by a reliance on trivially applicable mathematics, wholly without significance for the monumental issues that have to be tackled in the messy world of development. Above all, the element of humility that accompanies uncertain, tentative, undecidable, complex, incomplete, indeterminate dimensions, was pawned to a trivial dynamic formalization.
In some ways, this was a reaction to what Paul Krugman termed the “high development theory (HDT)” that flourished in the 1950s. At the 1992 World Bank Annual Conference on Development Economics (where incidentally future OECD Secretary-General Gurría gave the keynote address) Krugman argued that the core economic concepts of the HDT theorists- were not formulated and formalised in a language intelligible to the increasingly mathematised conventional economist. These concepts included increasing returns to scale, complementarity, extent of the market, and multiple equilibria with low-level equilibrium traps in poverty. Therefore, in a counter-revolution, the rich content of the HDT theorist was thrown away with the proverbial bathwater, prompting Krugman to call for a “counter-counterrevolution”.
Responding to Krugman at the same conference, Joseph Stiglitz was not entirely convinced, and in addition to questioning Krugman’s assumptions, raised two points that reflect what became known as the “Washington Consensus”: balanced budgets; relative price corrections (principally a competitive exchange rate); liberalisation of trade and foreign investment; privatisation; and domestic market deregulation. For Stiglitz, “the same currents that led to the dominance of free market ideology in the United Kingdom and the United States were reflected – at least in the United States – in the dominance of those ideas in certain intellectual circles. […] Krugman takes far too narrow a view of the development process and of what is wrong with both the standard neoclassical and the planning paradigms. […] If the central problems were those of externalities and increasing returns, the planning process would have been an appropriate remedy. But that assumption ignored informational problems, which are now regarded to be central.”
In short, Krugman says that HDT is dead and should be resurrected; Stiglitz thinks it never died, but lived on in other guises; and the Washington Consensus, simply ignored HDT. But despite their differences, they all attribute to the content of HDT a common set of characteristics predicated upon one or another form of competitive equilibrium theory.
In 1977, fifteen years before the World Bank conference, Graham Pyatt and Alan Roe highlighted another problem with development planning, one that had nothing to do with mathematical formalism or economic theory: “It is quite clear that many development plans are written with the sole objective of qualifying for foreign aid and that their existence implies absolutely nothing about a commitment to plan in any normally accepted sense of the word”.
Around the same time, Harry Johnson from the anti-Keynesian “Chicago School” identified the two theoretical culprits for the failure of multisectoral planning: “The Harrod-Domar equation […] automatically involved the same error as the ‘disguised unemployment’ concept, through its emphasis on physical investment and implicit disregard of the availability of labour, especially skilled and technical and scientific labour, to work with the material capital created by investment.” The solution was to enrich the growth models with human capital; underpin the generation of human capital with appropriate methods and frameworks for the generation of skilled, scientific and technical human capital; remove the mechanisms that would generate monopoly privileges; and decentralise the investment decision processes that lie at the basis of growth.
This was the basis on which the path towards “New Development Economics” was carved, via an “interregnum” with general equilibrium models for development policy. By the early 1990s, the time was ripe for miracles, and the clear message from analyses of the East Asian miracle was that a formula existed to replace poverty and misery with prosperity and plenty. Technology was the deus ex machina; competitive markets would provide the institutional setting in which decentralised decisions were implemented; the invisible hand replaced the dirigent’s fist; and efficiency was resurrected. But in this vision technology was wholly divorced from science and its institutionalisation. And so a rich vein of traditions and dilemmas that the early policymakers in Meiji Japan and the Nehru-era planners in India had grappled with when they were devising policies and visions of development was ignored.
Apart from the emergence of the Asian Tigers, two other facts of professional economics and economic life characterise this period: the “sudden” completion of the UN-ICP program on internationally comparative national income data, in the form of the Penn World Tables; and the emergence of New – endogenous – Growth Theory, going beyond the early Neo-classical models of (optimal) economic growth.
I do not find it credible to believe that the three great events listed above have anything to do with each other – either as a matter of fact, history or theory.
First, has there ever been the slightest investigation of the methods, sources, consistency and theory of the construction of the data that comes out of the Penn World Table stables? When I investigated the mathematical foundations of the construction of the index numbers that underpin the Penn World Table data, I was appalled to find that in the practical construction of the numbers that are used in international growth comparisons, the theoretical criteria are violated, which suggests that the actual numbers are unanchored in theory. (The Penn exercises and growth theory are analysed here.)
Second, there is very little evidence that any of the Tigers emerged as powerful economies following the policy precepts of New Growth Theory (and certainly not Japan in its transition from Tokugawa Feudalism to the Meiji Restoration and, then, through the Taisho and Showa eras). In other words, any underpinning of development theory on New Growth Theory is empirically meaningless.
Ultimately, there can be no theoretically closed system of development theory that can be encapsulated in a formal, mathematical, dynamic model with determinate solutions. But indeterminacy, undecidability and incompleteness can be formalised in algorithmic mathematics. I advocate such an approach to the formal study of development dynamics in the sense of Schumpeter and Paul Rosenstein-Rodan. No one would want to advocate an anarchistic theory of development; but it is entirely possible to advocate a mathematical formalism for development dynamics that suggests something like a formalisation of anarchy, however paradoxical this may sound.
We would like to thank Professor Alberto Quadrio Curzio, Editor-in-Chief of Economia Politica, who graciously accepted our request to base this article on Development Economics without Growth Theory, in Economia Politica, 1/2010, aprile.
Perspectives on global development from the OECD Development Centre