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An Essay on Economic Theory

Austrian School

❶There have been several schools of thoughts regarding the impact of government expenditure on the economic growth. Accessed on December 3, from:

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Initially, specifically in nineteen twenties after the civil war ended, the United States experienced drastic economic growth.

As a result of high supply of resources, United States attracted a lot of investors. Actually, it is during the beginning of the nineteenth century in the history of united stated which registered the highest rate of industrial growth.

More well paying jobs were created which increased the income of the citizens. The supplies of electricity as well grew at a very high rate. In fact, before the end of nineteen twenties, almost every house had electricity. The establishment of enhanced procurement systems like hire purchase enabled the American to purchase expensive products which they might not have been able to buy at once.

The United States economy was greatly enhanced by the development of car industries which was among the first industries which lacked in Europe. The high sales by car industry enhanced the growth of the United States economy by over twenty five percent.

In fact, by , almost every adult American owned a car. The increased rate of industrial growth and high supply of the resources resulted to heavy productions which exceeded the rate of demand within the United States.

As a result, much of the industrial products lacked market and thus remained unsold. On the other hand, in order to protect home industries, Europe enacted policies which laid high import duties on American products. These led to a lot of the products been wasted causing heavy losses on the industries.

Most investors were forced to close down their investments leading to high rate of unemployment in the United States.

Moreover, removal of market imperfections is also an important determinant of economic development of underdeveloped countries. Accordingly, market in those countries must be free from all sorts of imperfections retarding the economic development of the country.

Removal of market imperfections will make provision for flow of resources from less productive to more productive occupations which is very much important for the development of an underdeveloped economy.

Technological advancement is considered as an important determinant of economic growth. By technological advancement we mean improved technical know-how and its broad- based applications.

With the advancement of technology, capital goods became more productive. The following conditions must be satisfied for attaining technological advancement in a country: As underdeveloped countries have failed to fulfill these conditions thus their development process is neither self-sustaining nor cumulative.

Thus in order to attain a higher rate of development, the underdeveloped countries should adapt only that type of technology which can suit their requirements. Developing countries like Mexico, Brazil and India have been applying technologies developed by advanced countries as per their own conditions and requirements. Thus to attain a high level of economic development, the under-developed countries should try to achieve technological progress at a quicker pace.

In recent years, economic planning has been playing an important role in accelerating the pace of economic development in different countries. Economic development is considered as an important strategy for building various social and economic overhead infrastructural facilities along with the development of both agricultural, industrial and services sectors in a balanced manner. Planning is also essential for mobilisation of resources, capital formation and also to raise the volume of investment required for accelerating the pace of development.

Countries like former U. The present situation in the world economy necessitates active support of external factors for sustaining a satisfactory rate of economic growth in underdeveloped economies. Moreover, domestic resources alone cannot meet the entire requirement of resources necessary for economic development. Therefore, at certain levels, availability of foreign resources broadly determines the level of economic development in a country.

The external factors which are playing important role in sustaining the economic development include: Economic factors alone are not sufficient for determining the process of economic development in a country. In order to attain economic development proper social and political climate must be provided. The people of a country must desire progress and their social, economic, legal and political situations must be favourable to it. Emphasising the role of non-economic factors, Prof.

It is spirit itself that builds the body. Underdevelopment countries are facing various socio-political hurdles in the path of economic development. Thus in order to attain economic growth, raising the level of investment alone is not sufficient rather it is also equally important to gradually transform outdated social, religious and political institution which put hindrances in the path of economic progress.

Thus following are some of the important non-economic factors determining the pace of economic development in a country: It is the mental urge for development of the people in general that is playing an important determinant for initiating and accelerating the process of economic development.

In order to attain economic progress, people must be ready to bear both the sufferings and convenience. Experimental outlook, necessary for economic development must grow with the spread of education.

Economic progress is very much associated with the spread of education. Thus education is working as an engine for economic development. In this connection, Prof. So, education plays pioneer role for the creation of human capital and social progress which in turn determines the progress of the country. Conservative and rigid social and institutional set up like joint family system, caste system, traditional values of life, irrational behaviour etc. Thus to bring social and institutional change as per changing environment and to realise the modern values of life are very much important for accelerating the pace of economic development in a country.

Maintenance of law and order in a proper manner also helps the country to attain economic development at a quicker pace. Stability, peace, protection from external aggression and legal protection generally raises morality, initiative and entrepreneurship.

Formulation of proper monetary and fiscal policy by an efficient government can provide necessary climate for increased investment and also can stimulate capital formation in the country.

Thus in order to accelerate the pace of economic development the government must make necessary arrangement for the maintenance of law and order, defence, justice, security in enjoyment in property, testamentary rights, assurance to continue business covenants and contracts, provision for standard weights and measures, currency and formulation of appropriate monetary and fiscal policies of the country.

But the economy of underdeveloped countries is now facing serious threat from large scale disorder, terrorism, disturbances in the international border etc. All these have led to diversion of resources and initiatives from developmental to non-developmental ends. Moreover, under such a chaotic situation, capital formation process, business initiatives and enterprise of private firms are seriously suffered and distorted leading to a stagnation of economy in these countries. Economic development of a country also demands existence of a strong, honest, efficient and competent administrative machinery for the successful implementation of government policies and programmes for development.

The existence of a weak corrupt and inefficient administrative machinery leads the country into chaos and disorder. The development process of an underdeveloped or developing economy is not an easy task rather it is a complicated one as these countries are not having any common characteristics.

Thus the underdeveloped or developing countries are facing several constraints or obstacles to its path n economic development. These short-term constraints are related to over concentration and stagnation in agricultural sector, unemployment and under-employment, low productivity of capital, the growing deficit in its balance of payment position etc.

Again, the long-term constraints include infrastructural bottlenecks, financial constraints etc. The following are some of the important obstacles or constraints on the path of economic development of underdeveloped countries: In the initial part of their development process, most of the underdeveloped countries were under foreign domination which had led to the huge colonial exploitation by the foreign rulers.

Foreign rulers converted these economies as primary producing countries engaged in the production of raw materials only to be supplied to the ruler country at cheaper prices and also a potent market for the sale of the manufacturing products produced by the ruler country. Foreign capitalists mostly invested their capital on mining, oil drilling and plantation industries where they exploited the domestic workers to the maximum extent and remitted their profit to their parent country.

They have also destroyed the cottage and small industries by adopting unfair competition which has put a huge pressure on agriculture, disguised unemployment and poverty. After independence, these underdeveloped countries like India had to face serious obstacles to break this deep rooted impasse of low level equilibrium traps.

Market imperfections in the form of immobility of factors, price rigidity, ignorance of market conditions, rigid social structure etc. All these imperfections have resulted low level of output and low rate of productivity per worker. This has forced the gross output of these countries for less than the potential output. Suppose the country is producing only two commodities A and B. The production possibility curve AB represents the production frontier which shows the various combinations of commodity A and B that may be produced by the country to its maximum extent through its fuller and best possible allocation of resources.

Thus AB represents the potential production curve. But the actual production curve of the underdeveloped country denoted by AB lies much below the potential production curve AB due to market imperfections resulting in misallocation and under-utilisation of resources in the country. Thus due to market imperfections, the underdeveloped countries fail to reach the optimum production function due to lack of optimum allocation of resources. Another important obstacle or constraint faced by the underdeveloped countries in their path of economic development is its poor rate of savings and investment.

Inspite of their best attempt, the rate of savings of these underdeveloped countries remained very low, varying between 5 to 9 per cent only of their national income as compared to that of 15 to 22 per cent in the developed countries. Under such a situation, the rate of investment in these countries is very low leading to low level of capital formation and low level of income.

Vicious circle of poverty is considered as one of the major constraints or obstacles to the path of economic development of the underdeveloped countries. Vicious circle in the underdeveloped countries represented by low productivity is resulted from capital deficiency, market imperfections, economic backwardness and poor development. Low productivity results in low level of income and low rate of savings leading to low rate of investment, which is again responsible for low rate of productivity.

Thus the vicious circle of poverty is resulted from various vicious circles related to demand side and supply side of capital. These vicious circles of poverty are mutually aggravating and it is really difficult to break such circles. Demonstration effect on consumption level works as another major obstacles or constraints on the path of economic development of underdeveloped countries as it increases propensity to consume and thereby reduces the rate of savings and investment.

Here the consumption level of individual is very much influenced by the standard of living or consumption habits of his neighbours, friends and relatives but not by its income alone. Their knowledge is extended, their imagination is stimulated, new desires are aroused, the propensity to consume is shifted upward.

Thus this international demonstration effect reduces the savings potential of the underdeveloped countries and thereby creates severe constraints on the path of their growth process. Underdeveloped countries are facing peculiar problem in respect of adopting modern and latest technology.

Due to abundant labour supply and scarcity of capital, such technologies become unsuitable for these countries. At the same time the existing poor technology of these underdeveloped countries fails to raise the rate of productivity and also to bring them out of the vicious circle of poverty and thereby makes it uncompetitive. Most of the underdeveloped countries are facing the problem of rapidly growing population which hinders its path of economic development.

In most of the over-populated countries of Asia and Africa, the rate of growth of population varies between 2 to 3 per cent which adversely affects their rate of economic growth and it is considered as the greatest obstacles to their path of economic development. Rapidly growing population slows down the rate and process of capital formation. Growing population increases the volume of consumption expenditure and thereby fails to increase the rate of savings and investment, so important for attaining higher level of economic growth.

Instead it diminishes the rate of accumulation, raises costs in extractive industries, increases the amount of disguised unemployment and in large parts simply diverts capital to maintaining children who die before reaching a productive age. In short, resources go to the formation of population not capital. Moreover, rapidly rising population necessitates a higher rate of investment to maintain old standard of living and per capita income.

Growing population also results food problem, unemployment problem which forced the country to divert its scarce resources to meet such crisis. Thus, over-population results poverty, inefficiency, poor quality of population, lower productivity, low per capita income, unemployment and under-employment and finally leads the country toward under development. Another important obstacles or constraints to the path of development of underdeveloped countries are its inefficient agricultural structure.

Agriculture dominates the economy of most of the underdeveloped countries like India as it is contributing the major share of their GDP. Agricultural sector in these countries are suffering from primitive agricultural practices, lack of adequate inputs like fertilisers, HYV seeds and irrigation facilities, uneconomic holdings, defective land tenure and excessive dependence on agriculture.

Under such a poor structure, the agricultural productivity in these countries is very poor. Thus this poor performance of agricultural sector is another major obstacle in the path of economic development of these underdeveloped countries.

Inefficient and underdeveloped human resources are also considered another major obstacle towards economic development of underdeveloped countries. These countries suffer from surplus labour force but shortage of critical skills.

Due to lack of adequate number of trained and skilled personnel, the production system remains thoroughly backward. Thus this dearth of critical skills and knowledge in these countries has resulted under-utilisation and mis-utilisation of physical capital leading to lower productivity and higher cost structure of the production system.

Due to lack of adoption of modern technique in agriculture, industry and trade, these underdeveloped countries fail to stand in the competition with developed countries. Underdeveloped countries are also suffering from lack of adequate number of entrepreneurial ability. Naturally there is absence of modern enterprise and proper managerial talent, Due to poor socio-cultural climate and weak environment, the managerial talent in these countries fails to reach its desirable level.

Underdeveloped countries like India are facing serious obstacles due to inadequate infrastructural facilities. Thus the underdeveloped countries are suffering from lack of adequate transportation and communication facilities, shortage of power supply, inadequate banking and financial facilities and other social overheads which are considered very important for attaining economic development.

International trade has forced the underdeveloped countries to become primary producing countries where the terms of trade as well as the gains from trade have always gone against these underdeveloped countries.

There were certain disequalising forces operating in the world economy which made the gains from trade go mainly to developed countries. Most of the underdeveloped countries are facing the problem of political instability resulting from frequent change of government, threats of external aggression and disturbed internal law and order conditions.

This type of political instability creates uncertainty about its future steps and adversely affects the economic decisions of these underdeveloped countries relating to its investment. Due to such uncertainty, flight of capital in considerable proportion takes place from these countries to advanced countries and also retards the chances of flow of foreign capital to these countries through foreign direct investment.

Moreover, weak and corrupt public administration in these countries has been resulting a huge leakage of public fund meant for investment in developmental activities. Underdeveloped countries are suffering from backward social factors.

Inappropriate social forces impeding the economic development of underdeveloped countries like India include prevalence of caste system, creating divergence between aptitudes, joint family system, peculiar law of inheritance, outdated religious beliefs, irrational attitudes towards number of children in a family etc.

All these social forces are obstructing the path of development of these underdeveloped countries. Thus all these economic, political and social factors are equally responsible for the poor socio-economic set up of these underdeveloped countries and put serious obstacles for the path of economic development of these countries.

Attainment of economic development necessities a suitable environment for initiating, maintaining and accelerating the pace of economic development. Attainment of economic development in a country is very much related to social attitudes, political conditions, human resources, and also very much depending on psychological, social culture and political requirements of the country itself.

It embraces all aspects of social behaviour, the establishment of law and order, scrupulousness in business dealing, including dealings with the revenue authorities, relationship between the family literacy, familiarity with mechanical gadgets and so on. Economic development of a country does not simply require removal of some of its basic obstacles like market imperfections, capital shortage, various circle of poverty etc.

Following are some of the important pre-requisites for economic development of underdeveloped countries. In order to attain a self-generating growth of the economy, the people of the country must have a strong and positive willingness to attain such development. If the development strategy of the country is to be efficacious then it should be preceded by a proper economic organisation promoting such development and not hindering it any way.

The economic organisation of the country should be of that type which can respond well to the requirements of planning for economic development. A proper balance between the private and public sector initiatives is considered very important for evolving such an effective economic organisation. Thus in order to achieve fast economic progress, an underdeveloped country must attempt to introduce a rational reorganisation of its entire economy. Removal of market imperfections is considered a very important pre-requisities for economic development as such imperfections create a lot of obstacles in the path of economic development of underdeveloped countries.

Market imperfection is largely responsible for wide spread poverty in such economies. Moreover, market imperfections results factor immobility, under-utilisation of resources and thereby abstract sectoral expansion and the process of development. Removal of market imperfections can accelerate the pace of capital formation and can also widen the scope of capital and money market in these countries. The country should arrange cheap and larger volume of credit facilities readily available for its industrialists, cultivators, businessmen, small traders and new entrepreneurs.

Knowledge of these investors about market opportunities and new techniques of production should also be enhanced to the reasonable level. A whole hearted effort should be made to utilise its available limited resources in a most efficient and dynamic manner to its maximum extent.

Thus the removal of market imperfections leads to an efficient allocation of resources which finally leads to advancement of industrial and agricultural production and also to expansion of foreign trade resulting an successful effort to break the vicious circle of poverty.

Because this will generate adequate enthusiasm among, the general masses toward economic development of the country as well as for the successful working of the economic plan. Growing concentration of income and wealth in the hands of few and political influence generally protects the richer section from higher rates of taxation and thereby the tax burden ultimately falls much on the middle class and poorer sections of the society.

Underdeveloped countries like India usually face this type of problem. Therefore, it is quite necessary mat proper steps be taken to check such concentration of wealth and they should attain reasonable equality in the distribution of income and wealth.

Existence of a stable strong, efficient and honest government machinery is considered another pre-requisite for economic development. In order to formulate and implement economic planning along with a specific policy for economic growth, the government must be strong and efficient one, capable of maintaining internal law and order and defending the country against any external aggression. The development process of underdeveloped countries must have a domestic or indigenous base and it is considered another major prerequisite for economic development.

Plan for economic progress and social betterment cannot be initiated from outside of a country. Some developmental projects may be developed out of foreign aid but it should be maintained, with indigenous motivation. But too much dependence on external capital and external forces may dampen the spirit and initiative for development and paves the way for exploitation of natural resources of the underdeveloped countries by foreign investors.

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