Market as the key of growth.

One of several theories that try to explain the growth was developed by Adam Smith (1723 - 1790).

According to this economist (1723 - 1790), the key of growth is related to the market expansion.

The market accomplishes three functions: 

• It gives incentives to people to increase their productivity. 

• Any efficiency of production in any place of the market is immediately known for the rest (flawless information).

• The concentration of the demand allows to increase the specialization linked to the idea of trade.  People deals with that goods which have more productivity.

Smith considered that the growth of market had some limits.  For example, regarding technology he said that from XIX century on, it would not be more progress.  It means that the PPF could not be improve and the progress could be stopped.

The main critique to this theory is the non consideration of the technology.  Anothe critique is that the existence of a market does not warrant growth.

One of the contributions of Adam Smith was the "invisible hand". This "hand" means that the individual interest, that explains certain behavior of people, are guided, unwittingly, to contribute to the maximun wellness of population.

Bibliography:

Cameron R. (1992).  Historia Económica Mundial.  Alianza.  Capítulo 1.

North, D.C.,  y Tomas, R.P. (1989).  El nacimiento del mundo occidental.  Una nueva historia económica (900-1700).  Capítulos 1 y 2.

Offer and Demand factors

We can not undersantd the economic development in historical perspective without the mention of offer and demand factors (population, capital, natural resources, organization, incomes,... and so on).

Offer factors:

• Population: when the population is growing the offer of the work market is also increasing. Apart of this, we have take into consideration other factors:

• Demographic structure: developed countries have less young population that undeveloped countries.  This issue affects to the amount of active population.

• Employed population structure: it is regarding the amount of people working in primary sector, secondary or tertiary.

• Capital - investments:  the investment depends of savings.  In pre-industrial countries the accumulation of capital is small.  Regarding the capital we must distinguish two kind of capital: fixed capital (it is normally used during the production: machinery) and changeable capital which is used only one time (for example the raw materials, the existences or the surplus or excedents).  Inside the investment, we have to take into consideration the human capital investment, to adquire more skills, knowing or capacitations.

• Natural resources: it depends of the demand, the technology used to extract them, respect for sustainable development, etc.

• Technology: it is included next to capital and shows us the way that the production is achieved. Inside the technology we must distinguish innovation from invention: 

• invention is the development of something new or different, meanwhile
• the innovation is the difusion of the new technology or invent something.

• Economical organization: the organization gives an incentive structure.  This structure allows people to produce, more and better, or less and worse, or the same level.

Demand factors:

• Population: the amount of population produces an increase of demand.  This demand produces also an increase of the offer.  As consequence, more quantity produced induces a decrease in the prices at the long term.

• Per capita income: an income increase produces a demand increase.  When the richness is growing the consequence is a decrease of primary products and an increase of secondary products (for example luxury goods): "the smaller is disposable income, the higher the proportion spent on food"(Engel's law).

• Distribution of income: for example if the income is equally distributed and the population is not very rich, the savings are smaller.

• Savings-Investments: in undeveloped countries the interest type is higher than in developed countries, because of the lack of savings and high demand. If saving flows into investing the financial system will work properly.

• Market organization: the emergence of cities entails the concentration of the population, and thus the existence of physical markets where trading (at the begginig of Industrial Revolution London concentrated the 10% of the consumption).

Bibliography:
Cameron R. (1992).  Historia Económica Mundial.  Alianza.  Capítulo 1.
North, D.C.,  y Tomas, R.P. (1989).  El nacimiento del mundo occidental.  Una nueva historia económica (900-1700).  Capítulos 1 y 2.

The economic development in historical perspective

Through the following two points we are going to introduce the economic development in historical perspective.

• Economic History.
• Growth and development.

Economic History.  Purpose.

"Explain the structure, operation and the outcome of the economies" (Douglas North)

An economist is worried about the general characteristics of a society (structure), studies the institutional working (families and state), the technology operation, ideology of society and the preferences (institutional scope of oportunities and restrictions).

There is not only a concern about the economic performance but also about the factors needed for the economic growth and development (because of the existence of countries rich and poor).

The classical economy stablished a tripartite classification of the production factors: land, work and capital.  The total production of a economy is determined by the quantity of this factors used.

            

Growth and development.

The growth is possible thanks to the technology application because of capital investments.  These investments can be:

• Extensive: when the investments is made over more than one particular factor (land, work and capital).
• Intensive: when  the resources are used in a more effective way (that is to say, we have the same resources, but we are able to use better).

By other hand the development is the economic growth with a structural change.  This changes are substantial regarding to the structure and the organization of the economy.

Growth and development are not the same concepts.  As a rule, in countries where the industrialization is being born, to a certain extent, there is a big change in the Economy (development), while the growth is only starting to emerge (for example in UK during the first step of its industrialization).

The progress is linked to the development.  The growth of the economy is a reversible process, that is to say, the decadency could follow to this growth.  However when we speak about development and progress of economy, unfrequently it appears a regresive cycle wherein a country is able to lose out structures or organizations created in the past.

By other hand the progres (according to Cameron) is related to moral or subjective issues, unlike the growth and development which correspond to objective issues.

To understand the difference between growth and efficiency we will use the support of the production-possibility frontier example:

Bibliography:
Cameron R. (1992).  Historia Económica Mundial.  Alianza.  Capítulo 1.
North, D.C.,  y Tomas, R.P. (1989).  El nacimiento del mundo occidental.  Una nueva historia económica (900-1700).  Capítulos 1 y 2.