Transformation Mechanisms: A Critique of the Political Economy of Growth

INTRODUCTION

The research question of this critique concerns the transformation mechanisms that might enable the Underdeveloped Countries (UDCs) to metamorphose their current bleak and untenable state. The aim is to discern feasible courses of action that would help the UDCs better the conditions of their peoples. Such courses would provide alternatives to the flawed policy advocated by neoclassical economics and implemented by the Bretton Woods organizations. That policy, dubbed “structural adjustment,” is historically fallacious, theoretically deficient, and empirically ineffective. Yet the entire standpoint of mainstream[1] economics towards the UDCs is epitomized by it, a standpoint that engenders the Fund-Bank conditionality. The latter entails currency devaluation; abandonment of import substitution, subsidies and social programs as well as government control; reduction of the money supply, budget deficit and size of government, while unleashing unfettered market dealings through privatization, deregulation and opening the country to international division of labor through free trade.

On the other hand, if there are to be theoretical changes in economic thinking, there must be a historical understanding of how the particular aspects of the neoclassical doctrine that are now taken for granted as composing mainstream economics came into being. The neoclassical strategy called “structural adjustment” is premised upon a rendition of the Ricardian specialization, the outcome, in part, of Paul Samuelson's (1939, 1962) attempt at restating a public policy formula, essentially a nouveau laissez faire argument, based merely on pecuniary gains from trade. Toward this end, Samuelson applied welfare economics to international trade theory, thereby modifying David Ricardo's (1817) comparative advantage, formulated for the limited purpose of repealing the Corn Laws, by both the 1870s' marginal theory of Leon Walras, Carl Menger, Vilfredo Pareto and William Stanley Jevons, on the one hand, and his own revealed preference theory on the other.

Marginalism, a utility theory of value, attempted to prove that labor, contrary to the account of the labor theory of value (LTV), gets its “proportionate” share of income distribution from the national product. It differed from naturalism, utilitarianism and historicism in that it compared units of want and feeling instead of things. It attempted to refine the objective view of the Utilitarians by a subjective one, the source of value taken to be found in people and not in materials. This reckoning of everything, of prices and incomes, of wealth and of capital, by differentials and margins pseudo-psychologically measured, is the quintessence of Marginalism.

Along its lines, Samuelson's “revealed preference”[2] tried unsuccessfully to fix the incoherence of methodological individualism[3] upon which the theory is based. Individual emancipation is of course an objective which one should never lose sight of. Society, however, is not simply a sum of single individuals. To the contrary, a single individual is merely a unique member of society. The relational whole is much more than and much different from the sum of its mere fungible parts.[4] “A ‘science’ based on prognostications about individual behavior can only sink swiftly in the quicksand of individual variance; the individual is always ‘free;’ only aggregate behavior is more ‘predictable’ for being more ‘orderly’ --but never on the basis of individualist assumptions” (Kanth, 1977: 2).

Only organic-holistic thought, rather than atomism, can thus account for social phenomena.[5] It is only commonsensical that taking the individual as the unit of analysis misses significant interactions that can be explained only by reference to society. Evidently neoclassical methodological individualism attempts to address macroeconomic problems through microeconomic tools (so-called foundations). It deals with the various component parts of the economy as if the latter is the sum of its parts, and as if dealing with all the parts is the same as dealing with the whole. The method followed by Smith and Marx, to the contrary, is the deduction of inferences from the entire social existence, a unit of analysis much larger than, and qualitatively different from, the individual. Neoclassical methodological individualism must therefore give way to a societal political economics, thereby complying with the Durkheimian maxim that collective facts require collective explanations.

Samuelson, like Hume who two centuries earlier tried to replicate the paradigm of Newtonian physics, attempted to reduce economics, a social phenomenon, to an exact science.[6] His preference revelation is a sort of economic behaviorism,[7] whose stimulus-response pattern can be drawn from behavioral psychology, by establishing correlations between input phenomena and outcome measures, both as perceived by the economic researcher. Meanwhile, whereas behaviorism waned after 1970, rational choice theory took over, reverting to axioms of universal human properties of rationality and self-interest, thereby giving Samuelson’s revealed preference an extra lease on life, still with the aim of embedding economics into the method of the physical sciences. Ignored of course is the uniqueness of natural science.[8]

Samuelson wound up aligning himself with the factor proportion theory, a sought outcome of marginal utility, the end result of Bentham’s amateur psychology, whereby economics became the laws of wealth, deduced from the hypothesis that human beings were actuated exclusively by the desire to realize the most attainable pleasure with the least possible pain. Marginal utility changed the standard of measurement for exchange ratios, and the explanations given for the pricing and distributing processes under investigation. Feelings and marginal valuations took the place of outgo in things and in labor. Value became an act or a state of consciousness, an imputation of qualities to things and deeds, as exhibited in exchange. Concrete objects ceased to be the sole subject of measurement. Wealth became a fund of values, rather than a conglomeration of things physical. Production consisted of a creation of values. Like wealth, capital became a fund of values, employed productively. Costs became outlays of value, of labor, pain and Senior's abstinence (Alfred Marshall’s waiting; Irving Fisher’s time preference).[9] Wants lay at the bottom of every price and income. The premises of that persuasion were the hallowed perfect competitive ones, which fitted-in so well with Benthamism. The static, individualistic view alone satisfied the requirements of an "exact" economics.[10] Valuation could thus only be translated into prices, and costs would represent but the obverse side of the coin. In the pursuit of rationalizing laissez faire capitalism,[11] therefore, atmospherics unlodged realism.

Samuelson thus accepted comparative advantage but conveniently rejected its LTV's comparative cost component, Ricardo's contribution of the determination of value by labor time.[12] Classicism, in its Ricardian climax, the doctrine of labor cost value, was thus replaced, in international trade theory, by neoclassicism, the doctrine of exchange value. The subjective derailed the objective, the ideational supplanted the realistic, the amateur-psychological evicted the technical, intellect-psychic value overrode labor time value, internal categories displaced external things, personalism of Dühring and Nietzsche overruled collectivism of Rodbertus and Marx and of Comte and Durkheim, individual was substituted for estate and class, hedonism moved to the center stage. Neoclassical extreme abstraction and empiricism of Walras, Menger and Jevons eventually pushed aside evolutional historicism of Sismondi, Marx and Schmoller, as well as deist eternalism of Smith, Ricardo and Malthus. Contrary to the progressive trend through which humanity has moved from magic to reverse engineering, from godly power to experimentation, from temple to library, from astrology to astronomy, and from alchemy to chemistry, economics, under the auspices of neoclassical economics, has moved in the retrogressive direction according to which “endowment” topped labor, marginalism evicted LTV, pecuniary reductionism[13] took over holistic thought, private economics dethroned political economy, miraculous rationalization overwhelmed enlightened reasoning, and esotericism replaced accessibility.

The end result provided a reductionist concoction of the world, ripping out political economy (in whose sphere analysis and policy are inextricably intertwined, and the impetus to social change is to be found) from its socio-historical matrix, replacing it by a hermetically sealed system of fictitious economics, whereby nonpecuniary ends of policy (e.g., security, social, cultural, and civilizational ends) were considered mere distortions. The IMF-World Bank's strategy of “structural adjustment,” the assortment of measures based on this theoretical construct, will allegedly eliminate these distortions, and protect the UDCs from Jadish Bhagwati's (1953) and Harry Johnson’s (1975) “immiserizing growth.” But the claim made by neoclassical economics that abstract theories of price, interest, rent, etc., can, by ostensibly following the analogy of physical science propositions, be validly applied to the derivation of quantitatively stated conclusions from given unreal premises, is fallacious.[14]

Neoclassical economics has a tendency to treat presuppositions as self-evident, when they are nothing of the kind. Abstract logical constructs divorced from social activity have little value. The content of persons is mainly social, and the essence of society is mostly practical relations (praxis) --action, reaction and interaction.[15] The problem with the Bretton Woods[16] construct, therefore, lies in the very basis of neoclassical economics, upon which welfare economics and international trade and traditional development theories are superstructured. Its failure is located in the very ontological misconception of the nature of society, whose irreducible basis is abstracted from. Aside from the well-known serious theoretical shortcomings of neoclassical economics and its basis of methodological individualism,[17] the Heckscher-Ohlin-Samuelson (H-O-S) theory, the fundamental pillar of international trade theory that sets the scene for the neoclassical/Bretton Woods approach towards the UDCs, assumes:

(1) Only two commodities, two countries, two factors of production.

(2) Similar tastes across countries, i.e., the indifference curves are homothetic --symmetric along the ray, have the same slope along the ray, well-behaved.

(3) Perfect competition, i.e., a large number of producers and consumers, immediate access to information by all market agents,[18] a homogeneous good, and unrestricted access to the market.

(4) Constant returns to scale at the industry level, i.e., a homogeneous production function of degree one --firms are small, numerous, competitive, and price takers.

(5) Diminishing marginal returns to any input, holding the rest of the inputs constant, i.e., there exists a unique combination of prices of factors and commodities.

(6) Identical technologies, i.e., same production functions across countries.

(7) full employment.

(8) Immobility of factors of production across, and mobility within, countries.

(9) Relative factor "endowments" given, and different across countries.

(10) Ruling out factor intensity reversals.

(11) Unimpeded free trade: no transaction costs, no tariffs, no quotas, no subsidies (see Paul Samuelson, “International Trade and the Equalization of Factor Prices,” Economics Journal, 58, June 1948).

Whereas the processes of scientific understanding and theoretical progress can primarily come through delving into the world of facts, reestablishing contact with reality to bring the essential into relief and to make possible its analysis, not one of these arbitrary assumptions is realistic; in their collectivity they apply only to a bookish world. Of course if one is free to choose, pile up and postulate arbitrary and unrealistic assumptions, one can deduce rigorously any sought conclusions. However, such are irrelevant conclusions, which go nowhere in the real world, and can be reversed rigorously by different assumptions. Hence, under this assumption ridden theory, factor "endowments" become the source of trade, i.e., determine comparative advantages, and result in “factor price equalization.^”[19]

^{The

latter Samulsonian “theorem” holds that in the free trade “equilibrium,” factor

rewards are equalized in the trading countries, i.e., there would be a single,

unique wage rate in a free trading world. That world, however, was determined

for Samuelson by the mathematical imperatives of finding a “proof” to his

sought theorem. The “assumptions” are but conditions imposed by the

mathematical logic, or else no proof would be available. The mathematics took

over, and controlled and subjugated, the thought process, rather than merely

aiding it. Mathematical techniques became the master rather than the servant of

economics.}

Upon this prima facie unrealistic construct,[20] via a multitude of graphs, equations and jargon, “structural adjustment” is founded. The UDCs are thus required to follow the free trade path (i.e., surrender to free trade imperialism),[21] in order to overcome their "backwardness," to open their economies unhindered to transnational corporations, to specialize in the comparatively advantaged, labor intensive cotton, cocoa and banana, and to import the capital intensive manufactured goods from the DCs. That way, it is claimed, the UDCs can “capitalize on the gains from trade,” whereby their labor would be paid equal wages to those prevalent in the DCs. Given the unrealism of the assumptions, it is not surprising how fantastic are the inferences. It is those inferences, however, that set the scene for, and legitimize, the conditionality imposed by the IMF and World Bank on the UDCs, causing food riots and political destabilization, and further impoverishing the poorest strata in many of these countries.[22]

Whereas theories, concepts, methods, paradigms are to be evaluated by the explanatory power of the conclusions they reach about real world activities and processes, neoclassical economics totally abstracted from realism, including the aspect of power projection and use, replacing it with fictitious harmony. And having absolved itself of assumption realism (by what became known in the literature, following none other than Paul Samuelson, as the F-twist)[23] and gotten away with it, it decided that the exclusive end of UDCs' economies is to promote free trade, so that they can “capitalize on” its pecuniary gains. Any other objective is “political,” beyond the realm of the “exact science” of economics.

Protecting nascent industries and economies, learning by doing, diversifying the economic base for national security purposes, creating rather than relying on "endowment" comparative advantages,[24] engendering forward-backward-demand linkages in the economy, expanding the extent of the domestic market and division of labor, achieving equity in income distribution, mobilizing national energies and resources, enhancing domestic entrepreneurship and administrative cadres, diminishing dependence and augmenting interdependence, developing native technologies, preserving societal and cultural fabric and maintaining social harmony and stability, and stimulating national dignity and freedom from foreign "aid," in sum transforming the means and relations of production, and all objectives other than simple pecuniary gains from trade, according to neoclassical economics, are externalities, distortions, or beyond the reach of its rigorous, exact science. And the best remedy for these alleged distortions, it is claimed, is to avoid any protective measures and instead subsidize the export industries.[25]

That such construct is demarcated as (accorded the rank of) science is mind boggling; it reflects the outcome of the marginalists’ final deviation from the holistic thought of social science in the 1870s, mainly in reaction to, on the one hand, Marx’s penetrating critique of capitalism,[26] showing that the latter, no less than antiquity, feudalism or mercantilism, is a contingent historical phenomenon, and, on the other, Roscher’s and (especially) Schmoller’s frontal attack on the very method of British “classical” economics. A century of economics’ isolation from the social sciences, apprenticeship to the neoclassical nomenklatura, and servility to technocratic empiricism, has evidently accumulated an economic malformation. The self-elected “queen of the social sciences” is in bad shape.[27] The essential problem is the inability of neoclassical economics to coherently conceive of a collective good. All goods must be reducible to individual values, in order for the methodological individualist economic schema to be able to take cognizance of them. This is why social costs or benefits are regarded as “externalities,” or “distortions.” The problem is conceived in terms of the “external” effects of what should otherwise be regarded as an individual choice; there is no direct avenue for conceiving of a social good as such (Jon Mulberg, Social Limits to Economic Theory, 1995: 151).

In addition, this H-O-S theory, conveniently framed as it is in a barter fashion, abstracts from monetary aspects of transactions. Hence having the Coase cake and eating it too. Thus obliterating transaction cost differences, the neoclassical/Coase raison d'être of the firm and the market (on the basis that both emerge to cut down on transaction costs),[28] while attempting to rationalize comparative advantages. So, transaction costs create and maintain the firm and the market, but transaction costs, simultaneously, do not exist, so that comparative advantages can be accounted for: two essentially contested, if not mutually exclusive, rationales in the same overarching theory. Incoherence? That would be an understatement,[29] for it also includes inconsistency. Hence both the “internal criteria” for valid theorizing are absent (Freidrick Ferré, Knowing and Value: Toward a Constructive Postmodern Epistemology, 1998: 9).

The theory further ignores the fact that each transaction across a boundary is a function of, or results in, an exchange rate (the price ratio between the two currencies). Ignored also is the fact that a transaction determines the post trade price ratio for the two countries involved, or the change in international terms-of-trade, and hence real income change, ceteris paribus. Therefore, ignored is the fact that a transaction affects not only the equality or otherwise of the exchange, in terms of embodied labor time, thus the rates of employment and growth of the economy and the balance of payments, but also the stability and significance of national currencies. Absent from mentioning, furthermore, are other implicit assumptions of the theory: no history, no institutions, no exercise of unequal political power, and, indeed, no human society. The H-O-S theory abstracted from[30] all this; yet that theory constitutes the centerpiece of international trade theory, and the basis for the “free trade” stratagem, for “structural adjustment,” and for Fund-Bank conditionality.

Because that body of thought is represented by differently specified models, each modified with its own set of assumptions, the result is either untestability or simultaneous corroborating and refuting evidence for the same theory. This can neither be science nor a way of doing it, nor can it command mere commonsensical persuasiveness. No wonder the home region of H and O (Eli Filip Heckscher and Bertil Gotthard Ohlin), is the one area of the industrial world which most defies this theory. Instead of employing unfettered free-market postulates, Scandinavia trims and restrains capitalism. Traditional French dirigisme and étatisme, implemented also by Japan, are other examples from the DCs of the repudiation of the H-O-S theory, after as well as before the latter's inception.[31]

Empirically, furthermore, the DCs have not developed through Quesnay’s laissez faire, Smith’s free trade,[32] Ricardo's monocropping, Senior's abstinence, Bastiat’s Harmonies Economiques, Friedman's economic liberalism, or Samuelson's preference revelation. They did develop, among other things, through mercantilism, cameralism[33] and cut throat trade warfare (of the English-Navigation-Acts-type of 1651 and 1660), and through protectionist trade, sheltered industrialization, steered diversification and dirigiste government (of, e.g., Cromwell,[34] Colbert,[35] Bismarck, Meiji and Roosevelt, not to mention Stalin among this group because of his heavy-handed, totalitarian method). The US, the main promoter of unfettered capitalism, has been protectionist for most of its history (Joseph Schumpeter, “The Influence of Protective Tariffs on the Industrial Development of the United States,” in Essays of J. A. Schumpeter, 1951: 164-9). Indeed, relatively, it still is today,[36] in practice though not in disseminated theory (Karl Polanyi, The Great Transformation, 1944). "Western capitalism," contends Allen Sievers (1974: 82), "depended to a certain extent, in its formative days, on an experienced and protective state apparatus and ability to manage a complex venture on a state like, bureaucratic basis...and financial instrumentalities available to facilitate large scale and long distance trade" (emphasis added). This is put very mildly indeed, in comparison, e.g., with Karl Polanyi, Alexander Girschenkron, Eric Hobsbaum, John Galbraith[37] or Maurice Dobb, let alone Karl Marx. Today, however, when the sun sets in an underdeveloped country, neoclassical economics damn “government intervention in the economy!”[38] In textbooks, journals, IMF statements, World Bank bulletins, media programs, neoclassical attack on the role of government is unsparing.

Unconcerned about relegating the UDCs to monocropping,[39] and reducing them to providing the raw materials needed for the industries of the developed countries while remaining open markets for the latter's manufactured products, under the rubrics of “comparative advantage”[40] and “structural adjustment,” neoclassical economics has forgotten that the degree of comparative advantage in the US ante-bellum South was strong enough to chill industrialization, in favor of cash cropping (an exchange value production), and ruinous enough for the region to be still relatively underdeveloped a century and a one third after the Reconstruction, a mid-1860s overall “structural adjustment.” Nor does neoclassical economics pay attention to the fact that a major reason for the economic eclipse of Britain, at the turn of this century, was its continuous reliance on comparative advantage: It relied rather heavily upon those industries on which its early lead had been based. That is, rather than moving into the new industries such as chemicals, in which technological advance was now most rapid, Britain continued to rely upon the cheapness of its coal, to obtain a comparative advantage in the steam-driven, cotton textile industry. This threatened the British ability to continue extracting primary products out of other countries. Those countries would be well-placed trading with Germany, or the United States. Further, Britain could no longer actually sell its own manufactures in these German and American markets, where they were often undersold by more efficient producers, whose development had been nurtured behind tariff walls (see Gerry Kearns, “Fin de Siècle Geopolitics: Mackinder, Hobson and Theories of Global Closure,” in Peter Taylor, Political Geography of the Twentieth Century: A Global Analysis, 1993: 10).

Indeed, contrary to past experiences of the DCs, neoclassical economics ominously intimidates the UDCs with “immiserization” (not externality, neighborhood effect, spill-over, diseconomy, market failure, or market imperfection),[41] if they dare empower their economies to grow in the existence of such a "distortion" as infant industry protection. Further, the Hans Singer (1950, 1993)-Gunnar Myrdal (1957) infant economy protection is beyond the realm of neoclassical economics. Indeed, the entire structuralist school is damned out of hand as “Latin American.”[42] Premising instead the invalidity of import substitution,[43] protective tariffs (be they of the German nursery type, Mill's educative type, or any tariff type for that matter), and social safety nets, the IMF and World Bank use this construct to impose upon the UDCs a strategy of abrogating industrialization plans and dismantling welfare states. Then through validating so-called export led growth, it provides for the DCs' machinery and consumerism cheaply, in an unequal exchange with the UDCs, at the expense of their poor populations. For as a country merely forces the expansion of its exports, ceteris paribus, it only turns the terms-of-trade against itself.[44]

The evidence thus supports Mulberg’s conclusion, that “the lack of realism in economics is a defensive strategy which has been invoked to avoid the political conclusions to which economic theory would otherwise lead. This has resulted in an orthodox economic theory which is at best useless and at worst vacuous” (Jon Mulberg, Social Limits to Economic Theory, 1995: 3). This critique, therefore, dissents from the positivist reductionism of neoclassical economics, and adopts, once again, the holistic thought of political economy, deducing inferences from the entire social existence, and paying special attention to all relevant factors of economic action, not only to its pecuniary logic. Its primary relevance is to communities, countries, peoples, regions, governments, powers, rather than to unrealistic models, ideological abstractions emphasizing asocial individual behavior, or harmonious theologies of invisible hand and laissez faire. This critique also calls into question the Eurocentric ideology of economic universalism (which is in fact reification, since the operation of the economy varies according to the geopolitical-institutional set), and searches for other roads for UDCs’ transformation than the construct that fallaciously justifies inequity and myopically aspires to Europeanize the geo-culturally diverse planet.[45]

This critique, nonetheless, is conducted with the view that the question is not whether capitalism for the UDCs is or is not to be, since capitalism has many merits, as elaborated upon below in the body of this critique; merits that can be employed for the betterment of UDCs’ conditions. Pragmatically, moreover, capitalism for the UDCs is for now a fait accompli. The critique thus attempts to discern loopholes, in the workings of capitalism, which would enable the UDCs to function and transform themselves within that socioeconomic system domestically, and to navigate through it globally. The aim is not to change the endogenous workings of capitalism but to find exogenous, pragmatic ways for the UDCs to move ahead (transform), while accommodating themselves to the capitalist predicament. Capitalism did not evolve merely through purposeful action, nor can purposeful action alone (least of all that of the UDCs) eject that socioeconomic system. Capitalism, as much as any other epochal social occurrence and transforming economic institution, has resulted more from human action than from human design. The aim thus is to explore how the UDCs can live in the same den with that unmerciful companion, without continuing to be utterly pillaged by its workings, as they are experiencing now.

This aim, therefore, is not dogmatic: It is neither that the market be abandoned in favor of centralized planning nor that planning be discarded for the sake of freeing the market. Instead, the aim is to identify impediments in both market operations and planning strategies that might be hampering development, and to find ways of overcoming them. The question then is not whether a regime of free contract is or is not to exist, but whose choices does free contract give effect to, and how to prevent the powerful from manipulating the order to exploit the weak. Not freedom or no freedom, but whose freedom and for what. Not reform or no reform, but which (attainable) reform and for whose interest. Not private property of the means of production or not, but the extent these property rights reign, and the balancing (public sector/countervailing) rights for the dispossessed. Not democracy or no democracy, but whom does democracy empower, who rules and on whose behalf, and whether democracy is also substantive or merely procedural. Not government or no government, but whose government and for whom, and the economic jurisdiction as well as the scope and limits of this government. More specifically, this critique examines several substantive and pragmatic questions:

(1) In conditions in which the DCs are constantly pioneering technological advance in finance, manufacturing and agriculture, further augmenting the unequal exchange with UDCs’ primary products, is free trade necessarily in the best interest of the UDCs, as neoclassical economics asserts?

(2) Is foreign aid (always with strings attached), or, alternatively, a massive increase in savings (which denies the current generation any semblance of life), a precondition for economic advance? Or may the alleviation of other resource constraints (such as scarcity of entrepreneurial orientation, organizational and administrative regimes, and foreign exchange) be efficacious as well? How can foreign exchange be secured? Is the international finance body amenable to reform that would take the UDCs’ interests into consideration? What type of reform would that be? Is it likely to be implemented in the foreseeable future?

(3) If an increase in savings is needed, can this be achieved only by raising the share of capitalist profits in national income, as neoclassical economics claims?

(4) Does an increase in savings by capitalists, e.g., through supply side tax exemptions, lead automatically to an increase in productive investment and trickle down effect in underdeveloped conditions, as neoclassical economics alleges? Or does it lead to capital outflows, leaving the UDCs in ruins?

(5) Do UDCs have to follow a path of capitalist development similar to that of the extant DCs? Should industry focus more on a production des matières de premier besoin, as François Quesnay counseled in 1757 (in his Oeuvres Economiques et Philosophiques, 1969: 102-33), or on the neoclassical, exchange driven luxe de décoration, condemned by that physician of Madame Pompadour?

(6) Is the socioeconomic transformation operational? Does it lend itself to measurement and quantification? Can it be planned and monitored?

(7) How can economic growth be managed in the interest of the worse off people (the really poor people, not the anonymous factor of production)? What alternative courses of action need be pursued, still within a capitalist framework, if those people, not commodities or their interlocutors, are the principle focus of national policy?

These are the issues focused on, whenever appropriate, while analyzing various mechanisms and suggesting transformation themes. As to the benefits of trade[46] for the UDCs, these are under no dispute. The metaphor "free trade" used by neoclassical economics, however, is misleading, and results in unequal exchange, which is elaborated upon below. The critique thus includes components that are designed as full fledged courses of action, e.g., the structuralist mechanism, as well as relevant scattered, heterogeneous material (in critiques, case studies and other intellectual works), which were not necessarily meant to be complete transformation perspectives, e.g., Sievers' dispersed policy recommendations derived from his work on Indonesia. Besides the conventional orthodox mechanisms, moreover, the critique also employs works that are tabooed, ridiculed or ignored by neoclassical economics, and endeavors to put them to good use. These are the Marxian, structuralist and delinking perspectives, respectively. The critique further includes the often despised equity intermechanism, as well as the much hailed neoclassical efficiency mechanism, and illustrates the possibility of attaining an accommodating equity-efficiency tradeoff.[47] The basis and potentiality of the transformation themes are also elaborated upon.

Therefore, the inquiry is less "elegant" than current technocratic works in economics appear to be, for it encounters the classic problems of causality and explanations in the social sciences: Variables are so numerous that the differentiation of dependent from independent ones can at best be commonsensical; at worst, this unilinear causal construct has to be entirely discarded from the social sciences.[48] This is the nature of social phenomena, and the price of holistic thought, from both of which neoclassical economics has abstracted. However, elegance should never be mistaken for mere simplification. This inquiry, nonetheless, is far from being a Feyerabendian “anything goes.”[49] But nor is it a theoretical construct built upon unrealistic assumptions (à la Milton Friedman’s Positive Economics, 1953). It is neither nihilistic nor dogmatic, respectively. It is a pragmatic (realist) and functional endeavor, rather than strictly academic. It heuristically attempts to discern loopholes in the capitalist dynamics, through which the UDCs could exogenously bridle capitalism, tame it to suit their purposes, and figure out doable themes that might mitigate their dependency and underemployment, and alleviate their poverty.

This critique thus endeavors to discern intellectual foundations, which can enable a problem solving metamorphosis in the UDCs to take place, while attaining an adequate level of security and well-being for their increasingly eroding sovereignty[50] and vulnerable populations,[51] minimizing the degree and cost of dependence, while maximizing interdependence (symmetric rather than asymmetric dependence), as a necessary albeit insufficient step towards reordering their relations with the DCs. The aim is to provide versatile courses of action that would provide viable alternatives to the straitjacket of “structural adjustment,” prescribed through the fallacy of composition as a panacea for all. Because geo-economic reality is impervious to being thus encapsulated, in formal monolithic criteria, neoclassicism and reality are incommensurable. In the present state of knowledge one must resist the notion that any simple model will account for the whole transformation process. One cannot model it, say, as a production process which makes modernization, eighteenth-century industrialization, or the sustained rise of real incomes, the output of a handful of stylized inputs, while hoping to retain any sense of the historical complexity involved. Too many parameters shift and dissolve; long-term economic change in the DCs was much more than the usual conception of an "economic" process.[52] Moreover, the circumstances --economic, security, political, and social-- of each underdeveloped economy vary, and thus the appropriate path to economic and political development cannot be determined a priori, but only in the historical context of these specific conditions. Different development strategies must therefore be improvised for different contexts. And any well-conceived development strategy must respect the perceptions of underdeveloped nations on equitable, enabling and environmental issues, and reflect the different tracks of their development.[53]

The research method hereby adopted, therefore, is that of Smith and Marx,[54] critical inquiry, i.e., critique, using an interdependent-intervalidating amalgam of abstract deductive and historical inductive reasoning.[55] Smith and Marx did not, as is common in economics today, crunch some numbers in order to produce their scholarly works. Nor did they go to engage in some xenophobic chats at the coffee shops of the informal sector in rural Zaire[56] or at the bazaars of provincial Tajikistan, another method currently in vogue in economics, in order to establish the originality of their credentials. Smith and Marx read; thought; analyzed (textually and contextually, comparatively[57] as well as critically); elaborated; cohered; taxonomized; agonized; conceived; inductively investigated, corresponded, and corroborated their deductively theorized findings with reality; and only then slowly and laboriously made up their minds, and concluded. On the other hand, while empirical validation of a hypothesis is necessary for separating knowledge from belief and fiction, and every attempt is hereby made to that effect, through corroboration and comparative analysis, the challenge made by philosophers of science to both inductive[58] and falsificationist[59] approaches to empirical testing has produced no secure procedure, in which such validation may be grounded.

This critique is thus a thought process, which facilitates discerning some functional order in diverse and scattered material. It filters and classifies this material into related groups, with an eye on the intelligibility of the exposition, while seeking what this material has to offer for the improvement of the status of the UDCs. The taxonomy is a mere byproduct of this process.[60] This critique is therefore involved in taxonomizing only to the extent that the latter classifies the relevant material in a functionally intelligible order.[61] One has to make use of William of Ockham's razor: Entities are not to be multiplied beyond necessity, for it is not only arbitrary but also mistaken to postulate the existence of things, or kinds of things, unless one has to. Rather than from the taxonomy, the research thesis unfolds from the various elements of the critique. The taxonomy is thus not an end in itself, albeit it is a contribution of some significance. It coordinates courses of action and policy recommendations found by social scientists to have worked (or to be potentially workable) as prime movers in macro-societal transformation. It regroups some raw material in a more useful format. It organizes these into mechanisms that could potentially lead to the sought transformation. Such organization is built upon and hence discloses the relationships between concepts and the conceptual structures categorized as mechanisms.

Without further ado about semantics, a mechanism[62] is but a course of action, a process, a device, a strategy by which socioeconomic transformation is brought about. By transformation is meant Sievers' reading of the Ethical System implemented in Indonesia in the early decades of this century, with the focus on raising both the material standard of living of the people and its social welfare, and, through a mixture of private enterprise and government mediation, modernize the population's psychological, economic and political life; create a middle class; integrate the traditional and the modern sectors; stimulate output; industrialize; and provide social overhead capital.[63] Liberalism would exist only to the extent it reverts from laissez faire to its early humanistic roots, recognizing that when personal freedom and economic freedom come into conflict, the welfare of the people is paramount over that of the corporation's interest (Sievers, 1974: 132).

On the other hand, the senses in which this critique uses the terms economic growth and economic development, in contradistinction to transformation, are those of Furtado,[64] elaborated upon below, in the Structuralist Mechanism. Growth is essentially the mere rise of per capita income; development basically includes also the rise of productivity and the expansion of economic activities.[65] Both are limited to the economic domain, in contradistinction to transformation, which extends to the social, political and other aspects of society. A country is underdeveloped[66] if the technical, economic, military, administrative equipment at its disposal is so markedly inferior to that which is in the hands of other countries, that the resulting inequality leads to domination, formal or informal, of that country by its better equipped rivals (see Ernest Gellner’s “The Civil and the Sacred,” in Nowak & Paprzycki’s Social System, Rationality and Revolution, 1993: 320). It also leads to problematic social, cultural, and other human factors.

This critique embodies a topic embracing introduction (which also includes a methodological prologue), complemental abstract and conclusion, and quasi discrete chapters. The latter group the mechanisms --orthodox, heterodox, heterogeneous, and transformation versus growth-- and the transformation themes (reference to the Contents could mitigate any seeming complexity in the discussion that follows, and further mitigation could result from skipping the footnotes). Those themes unfold from the various mechanisms, whose aim is to serve the main functional purpose. They unfold, that is, from the first four chapters, then they are regrouped in the last. This modality precluded the separation of the literature review,[67] but, one hopes, saved redundancies and facilitated the unfolding of the themes. This is merely a matter of modality; there are no profound reasons as to why there are as many chapters, or as many sections in a chapter, or why some mechanisms are combined together in one chapter. The only purpose of the exposition’s modality, besides intelligibility, is the functional purpose of discerning what is there that might be of use.

The orthodox mechanisms, doctrinal and established, entail the classical, Marxian, Keynesian, traditional and Bretton Woods. The classical fosters division of labor, market extent and accumulation of stock. The Marxian credits primitive accumulation and institutional change. The Keynesian upholds demand management. The traditional suggests complementarity of industry and agriculture in a big push to achieve a takeoff within the context of a stages-of-growth theory. And the Bretton Woods advocates unfettered liberalization, dubbed “structural adjustment.” The Chilean experiment constitutes a case in point of Bretton Woods in action.

One can hardly inquire in social science today without taking the Marxian perspective into account, for much of contemporary social science is unthinkable absent the influence of Marx. It is only natural then that in the orthodox mechanisms the Marxian follows the classical, for this is their chronological order. Indeed, mainstream economics considers Marx --a theorist who albeit originated in the classical traditions has drastically changed the focus and direction of political economy and, virtually single-handedly, created a paradigmatic school of economic thought and worldwide disciples-- to be a classical economist, on the basis that he made use of the traditions of Smith and Ricardo. Paradoxically, it totally circumvents him in neoclassical economics. Hence while the new rendition of the classical school, neoclassical economics, depicts Marx as one of the founders of its parent school, it casts out his entire work as if he never existed. The study of the relationships between developed and underdeveloped countries is not of course the monopoly of Marxism, but cannot be authentically and fruitfully conducted in its absence, even as one ultimately disagrees with Marx's Voltairian revolutionary prescription for overcoming the problem of underdevelopment.

The Keynesian mechanism is the most serious endeavor in the last two centuries to reform capitalism from within, to infuse some realism into the unrealistic tenets of neoclassical economics, to replace the Great Depressions by a demand management growth (which is either ignored or attacked by supply side neoclassicism), and to institutionalize the international monetary system for the purpose of globalizing economic growth. Nonetheless, the resultant Bretton Woods organizations, geared essentially toward globalizing unfettered capitalism, dispensed with the entire Keynesian enterprise, and replaced it with neoclassical monetarism. In the process, these organizations have relegated the UDCs’ economies to a servitude status to advanced capitalism, and wrecked havoc in the lives of billions of people who constitute the poorest of the poor the world over.

Whereas the Chilean experiment is an illustrative case in point[68] of Bretton Woods’ design in action, the Keynesian work is imperative for understanding both the ex post facto rationale of FDR’s New Deal --undertaken spontaneously and ad hocly[69] in reaction to the second Great Depression (1929-38)-- and the “original intent” of establishing the Bretton Woods organizations. Both the rationale and the intent are of significance to the development of the central thesis of this inquiry, bridled capitalism.[70] The traditional mechanism, on the other hand, attempted to extend some specific roots of classical economics, but it is strongly influenced by neoclassical economics, and it is still the best endeavor the latter school can contribute to the UDCs' transformation process.

The heterodox mechanisms, dissenting and nonconformist, include the delinking and the structuralist. The former emanates from the two inseparable yet distinctive perspectives of neo-Marxism and dependency, both grounded in the theory of imperialism.[71] It is also affiliated with perspectives on the semiperiphery, basic needs, and new economic order.[72] The structuralist mechanism is a stand alone school, especially because of its unique (inclusive, linking) policy recommendations, despite some affinity with the theory of imperialism and its offshoots. Hence it is exposited independently. It advocates planned industrialization and raising labor productivity, infant industry and infant economy protections and egalitarian reform, as well as structural change through import substitution complemented by export promotion, but not the neoclassical export led growth, all to be done within a context of regional and subregional cooperation while remaining within the global economic system.

The heterogeneous mechanisms, nondoctrinal and eclectic, encompass a diverse assortment of transformative, aspect-specific courses of action. They are nondogmatic, sociological and/or nonuniform. They entail such pragmatic, problem solving approaches as Eric Jones' impediment removal, Allen Sievers' (Weberian) production promotion, Arnold Toynbee’s industrial revolution (as elaborated upon by Robert Heilbroner's development engineering), Nurul Islam’s food security, Ragnar Nurkse's balanced growth, Harvey Leibenstein's critical minimum effort, and Albert Hirschman's fore-back linkages. Those heterogeneous mechanisms are ones that could not be accommodated with any of the other mechanisms. They could make more than one chapter, and they could be further internally taxonomized. Neither step would affect the research thesis however.

The transformation versus growth mechanisms are depicted respectively by communal equity and neoclassical efficiency. Efficiency, the neoclassical preoccupation, is juxtaposed to equity, an indispensable intermechanism in underdeveloped conditions, to contrast their attributes while avoiding redundancies. Both efficiency and equity are suggested as intermechanisms, i.e., common to whatever set of themes elected, with priority to efficiency, to uphold the economizing merit of capitalism. Basing law and economics, as well as economics per se, only on neoclassical efficiency, whether the latter is defined in terms of Benthamite pure utilitarianism, Kaldor-Hicks wealth maximization, or Kantian-Paretian individual autonomy, is rejected. Meanwhile, the importance of communal equity, the seal of political economic legitimacy in the UDCs (Khaliel, 1995: 65-93), is emphasized.

Finally the critique is regrouped in the final chapter on the transformation themes, which starts by the manifestation of underdevelopment. The transformation themes are the proposed generic and supplemental ones, which make not commodities but people (especially the worst off among them) the focus of the transformation process, to help UDCs alleviate poverty and override their dependency and underdevelopment. The themes, after the manifestation of underdevelopment, are semiclassified into the needed transformation, bridled capitalism, distributional corrections, fiscal efficacy end equity, Bretton Woods reform, muddling through the Bretton Woods regime, and prospects for transformation.

And in their collectivity, the abstract, introduction and conclusion, following the Scholastics, expose, inter alia, the general purpose, method and findings of the inquiry. Any excessive attempt at elaborate rationales for this format both contradicts the concept of economism and is moot, because the aim, as has been pointed out above, is not to furnish a taxonomy, for the latter is beside the point, which is to find out what is to be done, irrespective of taxonomies.

As to research tributaries, this critique, in disenchantment with the reductionist method prevalent in economics today, its static analysis, unrealistic assumptions, and technocratic bent, is conducted in the holistic footsteps of Smith and Marx, in the sense of deducing discernments from the entire social existence (but without applying an overarching paradigm as did Marx). Both Smith and Marx recognized that the social problem was indivisible into purely economic or whatever categories. They thus attacked the questions at hand on the basis of this conception. The principal sources of Smith’s Wealth of Nations thus dig deeper than mere reductionist pecuniary concerns, which preoccupy latter-day economics, into moral sentiments, ethical codes, logical reasoning, political philosophy, national security, literary essays, jurisprudence and administrative law, and rhetoric and belles lettres (see Andrew Skinner, A System of Social Science: Papers Relating to Adam Smith, 1979; and Jeffrey Young, Economics as a Moral Science: The Political Economy of Adam Smith, 1997). Nor did Marx confine himself to strict pecuniary analysis to found his thought. He drew upon the collective profundity of German gentile philosophy,[73] world general history, British political economy, and French proto-socialism and sociology. Smith and Marx are thus the two source eclectic political economists par excellence, and this inquiry is conducted in their methodical footsteps.

An obvious disclaimer needs to be made explicit. This research is by no means unabridged, although, to the extent that one can evaluate, this is all there is of relevant value, negative as well as positive, in the literature. The monographs utilized in this critique are of course not exhaustive, but no literature of direct value and immediate relevance to its purpose is ignored or excluded. Of necessity there is a limitation on what to include, if only because of logical reasons. The political economic transformation literature is tremendous, and research comprehensiveness definitionally abridges encyclopedism. Prioritizing the tributaries of the inquiry, with the guidance of the research aim, is therefore inevitable. It is also important to stay within the general boundaries of political economy, especially its concern with prescription, as opposed, e.g., to the nonprescriptive domains within economic history, history of economic thought, international economics or international trade theory. Reference to such subfields is delimited to their overlap with political economy. There are also works that, for one reason or another, are incompatible with the first principles and aims of this inquiry, and thus can be either out of tune with its body and analysis or of no contribution to offer to its findings and thesis.[74] Analogous cleavages and cross purposes bifurcate this inquiry from such tributaries in the literature as "feminist economics," “miracle economics” and “teleological (theocratic) economics.”

Another disclaimer is that bridled capitalism, entailing the generic transformation themes, is not a panacea for all UDCs' predicaments. It is hoped only to provide a badly needed escape hatch out of the ineffectiveness of neoclassical prescriptions to UDCs' development, a life jacket away from the failed policies of the IMF and World Bank; a new, discriminating, architecture capable of providing selective and flexible responses to economic troubles and contingencies, from among a variety of nondoctrinal, nondogmatic, multipurpose options. Therefore the aim of this critique is to neither theorize economics nor “discover” a theory thereof. Nor is the aim to construct an overarching paradigm of whatever kind. The aim is only to explore problem solving exits (or ways) out of the current dire situation of the UDCs. If two and half centuries of classical and neoclassical economics, spanning thousands of genuine and reputable scholars, have not produced a sound theoretical foundation for the transformation process,[75] a single inquiry should not aim at (much less be expected to) solve this problem univocally --once and for all.

Anyone uncomfortable with generic underdevelopment should, therefore, justify the current undifferentiating stance of neoclassical economics encompassing all UDCs and DCs under the same economic “laws” and lumping together Brazil, Somalia, China and Singapore under the umbrella of “structural adjustment;” or, alternatively, come up with a better method, but still within a holistic framework. Ultimately, the persuasiveness of bridled capitalism, which is neither an overarching paradigm nor a law of motion, but merely an heuristic remedy, essentially resides in the absence of a better alternative. And absent a better alternative, bridled capitalism should be considered a step in the right direction, especially given that such variety of socioeconomic formations as economically liberal England, social democratic Sweden, and national socialist Germany were all intellectually based on generic capitalism, which encounters little, if any, objection.

There does not seem to exist a clean cut way out. Enlisting strictly in one or the other of the transformation mechanisms is bound to provide no solution. Therefore, the supplemental themes are necessarily rather eclectic to make full use of the entire gamut of transformation mechanisms,[76] of which none captures the whole truth but each holds some.[77] These supplemental themes are intended to address specific needs within the transformation process, in conjunction with the generic themes. They thus provide the needed versatility to bridled capitalism in order to address different problématiques in UDCs' economies. A particular set of supplemental themes, compatible with a given condition, may then be selected and used by an UDC according to its circumstances. Country studies could therefore determine, through situation specific contextualization, the most suitable supplemental themes to the case at hand.

A measured degree of eclecticism is also tolerated in the supplemental themes because mainstream economics provides neither effectual strategies for UDCs' transformation nor coherent theoretical foundations thereof. More important, applying neoclassical prescriptions in the last two decades has been empirically[78] detrimental to both the standard of living of the poorest strata and the transformative aspiration of the general populations in many of those countries. On the other hand, the prescription of the only other overarching (paradigmatic) school of thought in economics, Marxian revolution, is unattainable.[79]

For Marx the revolution is to come about in the advanced capitalist countries, not in the UDCs. However, he also realizes that even there "the trouble is that revolutions require a passive element, a material basis. Theory is going to be realized in a people only to the extent that it is the realization of its needs.... Will the theoretical needs be immediately practical needs? It is not sufficient that the idea strive for realization; reality itself must strive toward the idea" (quoted in Alfred Meyer's Leninism, 1986: 233). Empirically, moreover, the conception of a fruitful revolutionary society controlled by the workers proved so far to be not in the cards in the West, where the state of the proletariat has been improved, and proved to be impotent in Russia, where the proletariat was small and weak; it is therefore safe to conclude that effectual revolution is utterly unattainable in the UDCs, where proletariats do not even exist.

Revolutions, in the Marxist sense, arise out of insoluble conflict between productive forces and the system of productive relations in which they operate, which can only be overcome by a transition to another mode of production, and hence the hegemony of a different social class. This may or may not come to be true "in the long-run," when "we are all dead." In the short and medium-run, which is all that counts any way for a desperate UDC in today's neo-Leviathan,[80] revolution is unattainable also because of capitalist élite interdependence the world over, backed by power[81] structures of military alliances and technology and arms monopolies that preclude a weak and poor people from choosing even their economic orientation, much less revolting. If they unwisely do,[82] then a counter revolution can be easily concocted by power hegemons, after the poor strata have incurred heavy human and economic costs,[83] and the bourgeoisie has transferred its capital and hoarding abroad, leaving the country in ruin.[84] External hegemons need not even show up; they can merely rely on regional surrogates, or even supply and/or coach the domestic comprador bourgeoisie to do the job.[85] Divide et impera, from time immemorial, has usually worked. So, in UDCs' weak and divided conditions, a revolution cannot be carried out successfully as long as it is necessary, and will no longer be necessary, paradoxically, once it becomes feasible.

Even the century's most prominent revolutionary stressed the contingency of the century's most notable revolution. In a passage, quoted in Colburn (1994: 174), Lenin conceded that "if the Revolution has triumphed so rapidly it is exclusively because, as a result of a historical situation of extreme originality, a number of completely distinct currents, a number of totally heterogeneous class interests, and a number of completely opposite social and political tendencies have become fused with remarkable coherence." Quite an early testimony to the role of contingency, the underlying agent of change in the works of Stephen Jay Gould.[86]

Moreover, violent revolutions tend to fail to change the underlying dynamics that cause them, and they feed a cycle of violence that is hard to break. Furthermore, the revolutionary momentum, historically, is short lived after the revolution’s empowerment. Sustaining radical fervor for long, when a revolution has already succeeded, is hardly possible. Revolution engenders divisions among different segments of society whose interests clash. And revolution becomes tiresome to the average citizen and, eventually, constitutes a drain on popular support for new power holders.

Alternatively, the UDCs are not privileged with a Germanic tribalism that would produce bourgeois society through serf feudalism via gentile militarism. Nor do they have the luxury of sitting and waiting for an external stimulus, either direct colonial conquest, full economic penetration or all out proletarian revolution in the West[87] (the one in Russia has already proven impotent), for the Eurocentric processes of modernization, industrialization and economic development to take place on their own pace and take these countries out of misconceived feudalism[88] to utopian communism via disarticulated capitalism. UDCs' desperate situation can neither afford them to be that passive nor sustain them as all out revolutionaries.

The crux of the current UDCs' theoretic choice dilemma therefore is that while neoclassical “structural adjustment” is a sufficiently established and well-documented failure, Marxist revolution is unattainable.[89] And these are the only two overarching/paradigmatic schools of thought in economics. Both schools have come to exclude geo-economic categories, with neoclassicism portraying developmental economics as a harmonious psychiatry and neo-Marxism projecting it as a revolutionary theology. One has no alternative therefore but to venture beyond these two "rigorous" and "coherent" domains,[90] respectively, if any solution at all is to be found for the dire situation of billions of people in the UDCs. For that purpose, some principled eclecticism may not be too much of an intellectual inconvenience to endure.

One more reason for the necessarily eclectic aspect of the supplemental themes is that efficiency is hereby rejected only insofar as it is the single criterion upon which “law and economics” as well as economics proper are based. However, efficiency, in the straightforward sense of continuously rationalizing production, distribution and exchange, maximizing the ratio of output to input in each case, means economizing, which (together with provisioning --that counts most in underdeveloped conditions) is the essence of things economic, and as such cannot be abstracted from. Therefore to the extent that neoclassical economics enhances efficiency, one has to adopt that contributive part of that school, a part which is not given enough attention in Marxian economics (notwithstanding the works of Oscar Lange, Abba Lerner, and Maurice Dobb, specifying the conditions required for an optimum allocation of resources).

Again one more reason for resorting to measured eclecticism is that the labor theory of value is appreciated, essentially for commonsensical reasons; not even one scholar dare deny the fact that labor is a source of value or a factor of production.[91] Yet the significance of capital as another factor of production in modern economies is also appreciated, for pragmatic reasons. Smith's capital was basically a fund for the payment of laborers and the purchase of material, and not of machinery, the latter being considered merely an accessory to the labor force. However, in the same year in which Smith's Wealth of Nations appeared, 1776, James Watt succeeded in setting his first steam engine in motion. Only a quarter century later, therefore, fixed capital became a new fact of life that Lauderdale, in his Inquiry (1804: 254), pointed out that "not by supporting the laborer, but by replacing him, capital becomes a source of value." Viewed from a pragmatic standpoint, Lauderdale’s insight is certainly right, no offense to Marx's dead labor, or Ricardo's store up labor, for although either notion is a valid theoretical concept, it is beside the point: It defies functional operationalization,[92] it is not of much practical help to an UDC in need of foreign exchange (capital) to procure machinery for its industrialization program at the threshold of the twenty-first century. After all, Marx himself gave his monumental critique of the dominantly industrial socio-economic system the title Capital, not labor, presumably because it is capital that distinguished that system from previous ones.

Hence the proposed themes of this critique are no fixed dogma, but a mere general guide to action. They are an orientation, a framework of attitudes and practices for the interplay of forces. They are heuristics (rules of thumb), probatory and dynamic; they are not laws, nor are they, nor can there ever be, the final word on the matter,[93] for whereas nature may be immutable, society is constantly changing, whereby a static Being is merely a moment of the dynamic Becoming. Whereas mechanical motion is the product of certain physical forces, economic phenomena, especially in the power lacking intricacies of underdevelopment conditions, result, for the most part, from certain normative juridical postulates.

Every idea of economic policy has a definite perception of economic theory at its root. And whereas the object of perception to the natural sciences is not subject to the human will, and therefore eternal, the object of perception of the social sciences is molded by human beings and their wills, by concepts, sentences, utterances, by deeds done, acts taken, words spoken, and therefore changes with the history of humanity.[94] All things social change. Change, thus, is the only social constant. Moreover, because in the difficult conditions of underdevelopment, in contradistinction to those of development, one encounters as much human postulates as economic tendencies, because options are so limited, the germane question concerns as much "what is to be done" as "what is," and both aspects have to be related. Therefore the sought transformation will not develop by spontaneity alone. It has to be consciously pursued. It is not a law of nature, but a task of woman and man.

To want to exclude sentiment from economics, by neoclassical (Friedmanite) disinterested researchers who believe the realism of premises is irrelevant, is to attempt to square the circle, and in the process either self-deceive, be deceptive to others, or both. Persons (let alone societies) are not just "phenomenal objects," like rocks, trees and even animals, about which "laws of regularity and predictability" can be established, but are thinking, feeling, calculating, purposive beings. The human observer is also an instrument of observation and, like other instruments, requires a theory for its proper use (Abraham Kaplan, The Conduct of Inquiry: Methodology for Behavioral Science, 1998: 58-9). “Facts,” thus, never speak for themselves:[95] Both they and the observer arrive theory laden.[96] The laws that govern astronomy may interest some people, but the tendencies that regulate the distribution of incomes interest everyone. Nobody thinks the order of the stars good or bad, but everyone has an opinion on whether the order of the human world is right or wrong. No will to objectivity (Weberian freedom from valuation) can change this fact, even the most objective person cannot escape judging socioeconomic precepts. And the judgment of people on reality no doubt shapes, but more importantly is well- shaped by, this very reality.[97] Evidently, therefore, it is better to do without any overarching-schematic model than to use a mistaken one (the marginal productivity theory, especially with regard to distribution),[98] or to use the right one (the labor theory of value, especially its explanatory power of the inner workings of capitalism) the wrong way, dogmatically. And measured eclecticism, as the repudiation of piety or fideism towards one theoretical tradition, is certainly a virtue, a means of liberation from mystification.

Still another reason for measured eclecticism is that old economic theories do not die, and they do not die not because one is built on the other but because one is independent from the other. Indeed, in the history of economic thought, most disputes[99] over the fundamental aspects of economic analysis are due to factors outside the scope of economics per se. Such factors include conflicting currents of thought concerning methods of reasoning in the social sciences. Economics in an era is thus partially a creature of its episteme, the epistemological paradigm of the epoch. And more often than not an old episteme undergoes a revival through the process of cross cultural dialectics, thereby resulting in a renaissance of an old economic theory.[100]

Moreover, tolerating a measured degree of eclecticism in social inquiry is not unprecedented. Indeed, Rajaa' (Roger ) Garaudy (1969: 169) considers this method inevitable for dealing with the complexity and heterogeneity of social phenomena, undemarcated by an infinite range of gradations and variations. Half a century prior to Garaudy, Lewis Henry Haney, an ardent composer of eclectic thought, hence a disciple of historicism in the wider sense of the word, upheld, in his History of Economic Thought (1911: 256-78) and Social Point of View in Economics (1914: 41-3), the conclusions that a social point of view was the only correct one for judging economic phenomena, and that the great questions of political economy cannot be mustered in isolation from their setting in real life; hence the imperatives of principled eclecticism. The medal of eclecticism, however, goes of course to Marcus Tullius Cicero, whose seminal eclectic political economic philosophy, written in the first century BC, draws on Platonic, Stoic, Epicurean and Aristotelian sources.[101] And references to Augustine of Hippo and Thomas Aquinas, other masters of eclecticism, come later in this critique.

Economics, in contradistinction to political economy,[102] is little more than an expression of the time that has created it; “economics,” contends Rajani Kanth, “is simply the crown jewel of the ideology of capitalism, nay modernism”;[103] and “economics,” argues Donald McCloskey, “is nothing more than a species of persuasive rhetoric, not really different from literary criticism and aesthetics” (Quoted in Mark Blaug, in his Not Only an Economist, 1997: 23). Neoclassical economics, no less than scholasticism, and the sooner the better, will thus succumb to the fundamental fact of all history, by which in the course of time even sense turns to nonsense, truth to error, and the unimaginable to commonplace. The whole history of thought testifies to the relativity and historicity of human understanding. Nothing is quite certain. Nothing holds true for more than a time, whether the subject matter is creed or deed, thought or thing, economics or politics.[104] The "doctrine of Menger, Jevons and Walras is today the dominant dogma," contends Stark (1994: 215), adding that "Edgeworth's and Pareto's disciples consider the theory of marginal utility and equilibrium as a piece of eternal truth.... But even this new doctrine is only the expression of a transient epoch in the change of history, yesterday not yet dreamed of, today in full splendor, tomorrow abandoned and forgotten."

This century alone, several tangible empires, not just theoretical constructs, have disappeared altogether: the Ottoman, Austro-Hungarian, Japanese, Third Reich, French, British and Soviet. The empire of neoclassical economics, mighty as it may feel today, can and should expect no better. This is the verdict of history. For "though economic analysis and general reasoning are of wide application," conceded none other than Alfred Marshall (1890: 66), "yet every age and country has its own problems; and every change in social conditions is likely to require a new development of economic doctrines." Neoclassical economics, no matter how hegemonic it is today, has no monopoly on the kernel of truth then, and it would do well-by adopting a tolerant attitude towards intellectual dissent from its method and inferences, even if such dissent appears as heresy (see Colin Wilson, The Outsider, 1956); where else if not in the United States’ land of pluralism?

At any rate, preference revelation is not much better than the order of seating among the angels in heaven, given that one full millennium has separated these two preoccupations.[105] The hallmark of the Veblenian critique of orthodox economics, in The Theory of Leisure Class (1899: 155), is that individual wants are socially manipulated, and it is therefore futile to demonstrate how aggregate satisfaction can be maximized by markets: Both are created by vested interests. John Kenneth Galbraith, in The Affluent Society (1958: 149), argues that “it is the process of satisfying wants that creates the wants.” Paul Sweezy, in The Transition from Feudalism to Capitalism (1976: 89), argues that "even under such a dynamic system as capitalism, spontaneous changes in consumers' tastes are of negligible importance." Indeed, even Joseph Schumpeter, in Business Cycles (1939: 167), reasons that under capitalism "consumers' initiative in changing their tastes...is negligible and that all change in consumers' tastes is incident to, and brought about by, producers' action."

Beyond all that, moreover, eclecticism is the method of the social science as no other. It is, as shown above, the method of Cicero, Augustine, Aquinas, Smith, Marx, Haney, Garaudy and many other original pillars of social science. Political economy is ipso facto eclectic; indeed its strength is that it draws upon the work not only of philosophers but also of lawyers and various social scientists, particularly sociologists, economists, psychologists and political analysts. To elucidate the meaning and value content of ideas by which different actors are guided, to embrace the philosophical, psychological, sociological, legal and economic components of social phenomena, political economy has by necessity to be eclectic.

Furthermore, there is the critical evaluation of political economy’s findings, and hence a concern with the methodology of inquiry,[106] which is informed by the philosophy of the social sciences, another determinant of eclecticism. Also, prescription may result from analysis of contemporary conditions; for example, arguments in favor of activist government could be based on a particular diagnosis of political, rather than economic, malaise. Finally, but not exhaustively, the analysis may reflect a concern with the examination of diverse political economic, not merely economic, generic theories, such as liberalism, Marxism, and so forth. Therefore, political economy’s unique contribution comes essentially from being an interdisciplinary endeavor, given at least its bidisciplinary appellation. In fact, had it not been for practicality the name of this interdiscipline would have extended to include law, history, philosophy, sociology, psychology and more, for the amalgamation of different disciplines --and hence research traditions-- “may produce a sum greater than the constituent parts” (Larry Laudan, Progress and its Problems: Towards a Theory of Scientific Growth, 1977: 103).

The generic themes constituting bridled capitalism, on the other hand, are essentially noneclectic. Anyone unaccustomed to eclectic thought can thus forego the supplemental themes and focus only on the generic ones. Concededly the latter are grounded neither in neoclassical nor in Marxian economics. Hence they reject “structural adjustment” as well as delinking revolution. They are nonetheless grounded in the pragmatism of James, Peirce and Dewey, and the realism of Thucydides, Clausewitz, Carr, Morgenthau and Bhaskar. They endeavor to balance the conceptual-theoretical with the empirical-historical, that is the transcendental aspect of German idealism, as embodied in Leibniz, Kant, Schelling and Hegel, with the materialist dimension of English empiricism, as upheld by Hobbes, Locke, Bentham and Mill. The generic themes emanate from the theory of imperialism, whose nexus to capitalism is analogous to that of circulation to production (as elaborated upon below), but nonetheless seek reformative moderation, following Burke, Owen, Keynes and Camus, rather than revolution. Instead of Fund-Bank economic liberalism, therefore, socioeconomic reform is the themes' dominant principle in prescribing economic policy.

The generic themes acknowledge both the spatial as well as the class relations of production and exchange as tributaries of socioeconomic formations in underdeveloped conditions. They combine, and balance the tradeoffs between, the a posteriori inductive recognition and interpretation of the Is, in the light of realism and pragmatism, with the a priori deductive identification and codification of the Ought. The themes thus are no neat positivist[107] reducibles, because the concept of economic value as well as the phenomena of price and distribution form essentially social categories. And a study of these can produce satisfactory results only when it is attempted from the outset via a social perspective, the subject matter of which is human --including international-- relations. "Economics is today only a science insofar as it expands into a sociology," proclaimed Schmoller (in Stark, 1994: 71). "Its observation must be investigation into the social forms of economic life," added Schmoller. By thus exiting the neoclassical method, abandoning its ideational harmony and monolithic inference, and venturing instead into the realist turmoil of power relations[108] and pluralistic thought, moreover, the combined generic and supplemental themes are intended here to provide needed versatility to bridled capitalism, in order to address diverse problématiques in UDCs' economies and their sought transformation.

There exists no conceptual problem then for broad development themes composed of a blend of the most suitable insights and formulations, and even postulates, from the right-conservative-orthodox economics (absenting Marx), the center-reformist-heterogeneous tradition, and the left-radical-heterodox school. Muddling through different aspects of transformation, within a variety of states of underdevelopment, that often lack the luxury of pure choice, needs more than one entrenched recipe. The important point is to set the objectives of transformation clearly, then pragmatically approach them from the most feasible themes. In light of more abundant data, and more thorough analysis (by going beyond the narrow and reductionist market formalism, and democratic rhetoric), more judicious appraisal and sober judgment are likely to evolve as to why underdevelopment compels lower levels of liberalism than does development and what can be done about it. A way out of the neoclassical stand with respect to the UDCs, which amounts to claiming that all their problems are the result of ignorance or unwillingness to make full use of the virtues of neoliberalism and the vision of the IMF, is badly needed. This study is thus designed as a vehicle for critically examining, rather than merely promoting, the fitness in kind and in degree of contemporary liberalism to conditions of underdevelopment, and pragmatically accommodating UDCs’ transformative purposes and remedies to its workings.

One final disclaimer is that this critique is not an attempt at a full fledged theoretical synthesis. It is rather an heuristic, heretical, probe of how the UDCs can change their state within their current holistic, not just pecuniary, stance. Intellectual humility, if not realism, is thus in order. Heuristic here means probatory, tentative, not "hard core" as Lakatos (1967) uses it. One is not to be carried away and cavalierly think of, much less promise or claim, innovative originality. Nor should one be expected to produce such a theoretical (in contradistinction to descriptive) synthesis. Genuinely original syntheses are rare, difficult to arrive at, and usually take lifelong mental labor before materializing. Hasty attempts at a full fledged synthesis (definitionally unattainable through the reductionist neoclassical method), amount merely to banality, incoherence and/or unwarranted eclecticism. Instant originality in the social sciences, as can be discerned from observation, and as the history of thought makes abundantly clear, from scholasticism to communism to neoclassicism and beyond, is whatever furthers, accommodates or even merely propagates whatsoever mainstream hegemony happens to prevail at the time. On the other hand, heresy, even if heuristic, may turn out, later, to be of some use (not exchange) value.

This said, and with all humility, the fundamental conceptual insights of this inquiry are original. The very outlook of the inquiry, the thesis that a principled eclectic approach liberated from overarching ideologies (namely bridled capitalism[109] which essentially throws away the yoke of Marxian revolutionism as well as neoclassical laissez faire) is the most suitable way to muddle through the contemporary underdevelopment configuration, is original indeed. The concept that the underdevelopment problem is fundamentally as much one of security as of economics is original. The concept that an underdeveloped country’s economic orientation is determined neither upon mere materialist nor mere ideational underpinning is original. The concept that the security concern among other considerations, in conditions of underdevelopment, is primus inter pares in determining a country’s economic disposition as well as democratic tolerance, is original. The concept that when a UDC’s economy and security conflict, concerns about the latter prevail is original, and contradictory to Marx’s generic conclusion for that matter. Indeed, this inquiry’s very interdisciplinary breadth as well as its comprehensive treatment of the political economics of overcoming underdevelopment are original.[110]

Such breadth and treatment amount to a transdisciplinarity of approach that breaks free from both the magic formula of universal applicability and the artificial divisions imposed by the compartmentalization of the social sciences into separate subject disciplines. Instead, this approach attempts to employ a contingent, heuristic, nonreductionist social science that is, one hopes, capable of grasping the complexity of social phenomena, the wide variety of actors and rationalities (substantive, procedural, complex --recursive-reflexive) and motivations (economic, sociological, cultural, ethical, ecological, psychological), and the multiple determinations of social systems, without recourse to a purely idealist and teleological logic (see Ash Amin and Jerzy Hausner, Beyond Market and Hierarchy: Interactive Governance and Social Complexity, 1997: 8, 27).

Contrary to the neoclassical reductionist characterization of the economy, this approach strives to be sensitive to nonteleological change, cognitive and cultural boundedness, social and institutional[111] embeddedness, variant and diverse actor rationalities, autonomous and extroverted social networkings, cross cutting and conflicting goals, locational and temporal adaptations, oscillating and asymmetrical interdependencies, and contingent and contextual path specificities. This approach thus endeavors to analyze properly the dialectics between ontology and epistemology, between structure and agency,[112] and between individual and collective, in handling the forces and relations of production within the UDCs, and among the latter and the DCs.

The significance of this critique, however, is not a matter of intellectual curiosity and pondering, but of real survival value for billions of people in the UDCs. On the other hand, the endeavor to discern heuristic transformation themes from diverse political economy monographs on growth is undoubtedly a worthwhile intellectual contribution. Without any need to disclaim comparison, this is what Smith's Inquiry and Marx's Critique are essentially about. Indeed, Hegel's dialectic (1996: 216-37) treats this gradual assemblage process as the characteristic form of theoretical progress, the concept of aufhebung, expressing how opposites are deliberately and piecemeally canceled and preserved in a new unity. And aside from the speculative elaboration upon untested hypotheses, such as the notion that celestial bodies move in perfect circles, the great works of Aristotle, which much Western European thought adopted as its basis, consisted essentially of the systematization of earlier thinking in the realm of science, logic, politics and ethics, with very few novelties. The Aristotelian picture of the universe was of course composed of a group of perfect crystal spheres centering on, and revolving about, the Earth. That did not preclude its great contribution to the thought of more than one civilization.

Nonetheless, a more detailed research agenda beyond this work is yet to be implemented as to what the essential elements of strategies for planning, managing, and financing human development are; what the requirements of a practical framework for participatory development are; what a conducive external environment for human development is. Further research to prioritize various aspects of human development and to identify social returns to different types of social expenditures over time is also needed. Not least, country studies are in order to determine which set of supplemental themes is germane to specific country conditions. A comparative study of the internal and external conditions in nonimperialist European economies, seeking to elaborate on how these economies avoided dependent peripheralization and underdevelopment, is further in order. And the recrimination of UDCs' population growth as the cause of poverty needs serious reconsideration.[113] Finally, a question that is yet to be revisited intellectually is the reward for merit. On the one hand it seems fundamental for both motivating the bulk of the populace and enlisting the most talented to run the societal machine. On the other hand there is obvious injustice in rewarding talents and abilities for which a person has only limited responsibility --these being to a large extent governed by nurture, contingency and, perhaps, genes and brain chemistry. A lot of work is yet to be done, for this critique barely scratches the surface of how to overcome underdevelopment, how to help billions of desperately poor people in the world self-transform.

1. ORTHODOX MECHANISMS

This chapter focuses on the orthodox mechanisms of socioeconomic transformation. These are doctrinal, established and prevalent theories of economic growth. The aim is to point out, analyze and elucidate the contribution each of these theories can lend to the specific objective of improving the current situation in the UDCs. Needless to repeat, this will be the aim of each of the first four chapters with respect to the theories involved. The perspectives discussed in this chapter are either unsuitable for direct application in the UDCs, or speak for historic circumstances that are different from, or no longer characteristic of, the situation of the UDCs at the threshold of the twenty-first century. They nonetheless provide the foundations for the other perspectives discussed in the following chapters.

Any potential loose ends, therefore, are cumulatively tied in by the comparative process in the following chapters, especially by the regrouping of chapter five. For there are concepts in the following chapters that need to be introduced before some comparative analysis can take place. That pattern also much reduces redundancy. Moreover, any chapter is not a stand alone project; it is a part of a whole, and has thus to be considered in the entire context in which it exists. More important, in any nonreductionist research, which is the sine qua non of the social sciences, no matter how the topic is taxonomized, its different aspects cannot be neatly demarcated. Contrary to the claims of positivism, a water tight classification in the social sciences is a contradiction in terms. All chapters are thus semidiscrete.

The analysis is narrowly tailored to include only those mechanisms as projected in the works of primary representatives of pertinent schools. Smith,[114] Ricardo[115] and Mill[116] are considered, inter alia, to best represent the general thought of the classical school. On the other hand, while Marx is the founder of his school, Evgennii Preobrazensky is generally credited with originating the conception of socialist metamorphosis.[117] But it is Dobb who really best relates the Marxist theory to the early practical endeavors aimed at transforming the former Soviet Union and the countries of Eastern Europe under the socialist regimes. These three authors, therefore, are selected to represent the Marxian prescription for transformation. Keynes is doubtless the best spokesperson for his perspective. As to the traditional perspective, it is commonly accepted in the social science literature that among many contributors to that school, William Arthur Lewis and Walt Whitman Rostow stand out.[118] And although the literature on Bretton Woods is ample,[119] nothing is as credible in projecting the deficiency of that regime as its institutional publications, except for a concrete case of applying Bretton Woods’ “structural adjustment.” This is illustrated by the Chilean experiment.

1.1 The Classical Mechanism

"Natural progress of opulence," or long-term economic growth, according to Adam Smith, is achievable through accumulation of stock, division of labor[120] and improved skills (hence economies of scale and specialization --not machinery), and market extent.[121] The latter means extension of the scope for profitable international trade through improvements in law and order along trade routes, the expansion of low cost water borne transport, increasing savings --especially from manufacturing-- to create and make use of new markets, elimination of all obstructions to free trade and competition, and the abolition of laws of primogeniture and entails, which prevent the break up of large landed estates (Smith, 1776, I: 407-9, 441; II: 84). Smith's opulence also include peace, easy taxes, political competition, positive role of public authorities, and national security considerations, all within an accelerating growth policy. However, defense is more important than opulence, hence strategic and national interests justify a policy of trade restriction such as the Navigation Acts.

Smith builds his strategy for long-term economic growth on the premise that the desire of the individual to better his condition is the mainspring of progress. The growth of opulence is treated as the unintended consequence of short sighted behavior largely directed towards meeting private needs, and motivated by a persistent desire to improve both personal condition and social status (Smith, 1776, I: 477-8). His "system of natural liberty and perfect justice” serves simultaneously as an explanatory and normative means for the conduct of human affairs in economic matters (Smith, 1776, I: 157, 344; II: 37-8, 208). It seeks to show that the untrammeled pursuit of individual self-interest under competitive conditions can, and ought to be allowed to, create a harmonious public order in which the benefits of economic growth and efficiency, chiefly in the form of rising wages and lower prices and profits, will be most widely diffused throughout society.

Smith further argues for free trade and competitive markets while attacking mercantile restriction and monopoly privileges granted by the state (1776, I: 411, 456; II: 191). In contradistinction to later, more extreme versions of laissez faire individualism of the Senior (1971) and Friedman (1953) types, however, Smith paid as much attention to the institutional[122] preconditions required to produce a socially beneficial result as he did to the internal connections forged by economic activity itself (a bent that is abstracted from now by neoclassical economics). Moreover, he did not employ rational-economic-person assumptions (as neoclassical economics now does), and was at least as concerned with the political and moral byproducts of economic activities in contemporary commercial societies as he was with material benefits for their own sake. Indeed with regard to the latter his position must be regarded as distinctly skeptical and ascetic.

Smith, whose thought was selectively dismembered and reduced to laissez faire[123] by the neoclassical school to buttress its self-serving purposes,[124] also believed that government had significant duties to perform with respect to education and the provision of public works that could not be left to private initiative.[125] Thus state supported education was particularly important as an antidote to the effects of the division of labor in undermining the mental, moral, social and political capacities of the populace at large (1776, II: 232-53, 309-40, 444-56).

Smith therefore expected that the duties and even the size of government would grow with opulence, but he was anxious to devise means by which essential functions could be supplied without undue burden in the form of taxes and growth of unproductive activities. Hence his interest in proposing extra market institutions designed to achieve this result by methods that matched incentive to performance. The production of wealth, however, not the welfare of people, was Smith's first priority. In his own words, "the great object of the Political Economy of every country is to increase the riches and power of that country" (1776, I: 394).

The Smithian economic course of action for producing growth, therefore, reduces to the expansion of markets, the enhanced productivity resulting from the division of labor, and capital accumulation arising from private thrift under conditions ensuring political security. These are the most important aspects of Smith’s prescription for economic development relevant to the UDCs’ situation.

David Ricardo (1817) suggested a bifurcate strategy of escape from the stationary state. The latter results from the increasing scarcity value of good land, which raises rent, hence redistributes national income towards the land-owning class. Meanwhile, the share of profit is reduced until, as a result of steadily rising marginal food production and wage costs, profits in both farming and manufacturing are squeezed to zero. The stationary state then reigns. The two components of escape are the introduction of technical innovations in agriculture and the use of international trade to obtain lower cost food in exchange for manufactures (Ricardo, 1817: 79-82, 128-33, 266-72). The significance of expanded trade lay not so much in the enlargement of the market per se as in the fact that it could lead to increased profits through a decrease in the price of wage goods and greater efficiency in resource use by specialization according to comparative advantage.[126]

Less pessimistic than Ricardo, not to mention Malthus (1798) and his “abysmal” science, John Stuart Mill (1848) emphasized the momentum of change, and boundless prospects for improvements in technology, opportunities for increasing imports of cheap wage goods, including food, and opportunities for capital export, and contended the power of commerce could keep the peace among nations. Hence law and order promoting stable commerce, new capital and techniques and the indirect (dynamic) and direct (static) benefits of commerce were components of Mill’s approach to economic growth.[127] Mill also wanted to see increased voluntary restraints on population growth amongst working people, which, unlike Malthus, he was confident could be achieved, combined with a more equitable distribution of the gains from economic growth. Mill thus adopted the view of cumulative improvement in the underlying economic structure --of equity gains and of efficiency gains. Mill's view of cumulative improvement in the underlying economic structure, however, focuses more on efficiency gains than on equity gains.

In sum, classical scholars focused, in their work on growth theory, on capital accumulation, savings and investment out of profits, institutional change, trade, market expansion, technology, population growth and natural resources. The main concern of classical economics was the wealth of the nation, the way it grew over time, and how the distribution of income changed with growth. The chief interest was the long-run, the "normal" rather than "market"[128] prices, and the aggregate incomes of strata such as laborers or landlords rather than the wage paid a given laborer. In matters of policy, classical economics was reformist, with proposals based on the newly developed social science of political economy. A fear existed, however, of a possible brake on growth due to diminishing returns in agriculture.

The essential contribution of the classicists therefore is:

(1) The provision of an account of the forces influencing growth (a wider, societal sense than mere economic growth as used today in neoclassical economics), and of the balances necessary to maintain the growth path.

(2) The recognition that it is the accumulation and productive investment of a portion of the social product that is the driving force behind the growth.

(3) The awareness of the interrelatedness of the activities of production, exchange of commodities, the distribution of the social product, and the accumulation of capital.[129]

Amongst the most notable features of classical growth discourse that could be of value to UDCs transformation endeavors, therefore, are:

(1) The importance of market expansion as a stimulus both to the growth of total output and to raising labor productivity (in the UDCs’ case, this would mean their own market expansion, not that of the global or DCs’ market).

(2) The importance of profits as the source of finance for new investment, in contrast to the unproductive use of land rents and the zero or minimal savings capability of wage earners (hence some of the significance of the incentive system and the private sector of the economy).

(3) The potential of an agricultural sector dominated by rentier landowners to impose a brake on overall economic growth (Ricardo) --hence the importance of diversification as well as on the one hand regulation and on the other antitrust (pro-competition) laws.

(4) The need to liberalize trade as a means of enlarging the market (Smith) and of capitalizing on comparative advantage (Ricardo) --without turning the latter into a dogma that fetters economic dynamism and evolution.

(5) The importance of technological change in raising labor productivity and in helping to meet the food and raw material demands of a rising population --hence the necessity of throwing off the yoke of assigning the UDCs to primary production using primitive means thereof, which the H-O-S core of neoclassical international trade theory calls for.

1.2 The Marxian Mechanism

From the long line of classical growth theories, and his direct observation and analysis, emanated Marx's views on extant industrial capitalism. The transition form feudalism to capitalism is a necessary condition for industrialization and growth. Only under the capitalist mode of production, whereby the production is for exchange value, and surplus is the means for monetary assets accumulation (i.e., fixed capital, not wealth, accumulation), are growth and technological progress readily attainable. The economy is determinant, in the last instance, of sociopolitical change; social action and political outcomes are epiphenomena of the economic.[130]

Evidently, Marx's early philosophical works led him to question the naturalistic basis of classical political economy. Marx’s historical materialism, i.e., dialectical materialism applied to the sphere of society, marks a fundamental break with the classical German philosophy of Hegel and Feuerbach. It replaces metaphysics by dialectics, and idealism by materialism. Hence his questioning of the “naturalistic” basis of classical political economy. The error of the classical writers was to naturalize (or present as universal) the historically specific social relations of capitalist society. Marx realized that capitalism was a type of economy just as English is a type of language, Christianity a type of religion, democracy a type of polity. None of these terms constitute a universal category.

Smith and Ricardo had figured out the notion of surplus value. Quesnay had previously explained the “surplus product,” the excess of agricultural output over “natural” subsistence wages. However, Smith and Ricardo had missed the wood for the trees when they took its specific phenomenal forms like rent, interest and profit as separate, independent entities. In other words, they failed to see surplus value as the essence of the particular distributive shares, as the generic concept underlying the historically determined manifestations thereof.

Marx emphasized surplus value in its general character. He realized that behind the formal abstractions of the classical works (land, labor and capital producing rent, wages and profit) lay an unexamined historically specific postulate: private property. As much as the last thing a fish would discover is water, only by taking for granted the existence of private property could Smith and the others assume that classes were derived technically from the division of labor.[131]

Marx's works further indicate his understanding that the issue is not merely one of growth, but also of the economic, social, political, legal and conscious active metamorphosis of the social formation (i.e., transformation,[132] not mere growth or development), provided it has reached a certain level of development of its forces and relations of production, and of the state apparatus necessary to sustain these.

Precapitalist modes of production are hardly prone to growth or technical change, for the surplus is meant for use value and partially for luxury consumption, support of the state apparatus and aggrandizing public works of an unproductive nature.[133] In feudalism, since the immediate producers appear in combination with the means of production, and hence labor power cannot take the form of a commodity, the appropriation of surplus labor by the feudal lords takes place directly, by extra economic coercion (viz, political constraints such as feudal land property and guild regulations, as well as the pressures of manorial custom) without the mediation of the economic "laws" of commodity exchange. In capitalism, not only are the products of labor turned into commodities, but labor power itself becomes a commodity: The system of coercion disappears and the "law" of value[134] holds true over the entire extent of the economy.

The fundamental components constituting the process of passage from feudalism to capitalism, therefore, are: The change in the social form of existence of labor power consisting in the separation of the means of production from the direct producers, i.e., the change from feudal land property to industrial capital; the change in the social mode of production of labor power from serfdom to wage labor (which comes to the same thing); and the polarization of the direct producers, or the dissociation of the peasantry.[135]

For Marx, therefore, the conjunction of three phenomena accounts for the transformation of a feudal society into a capitalist formation:

(1) A rural social structure which allows the peasantry to be “set free” at a certain point.

(2) An urban craft development which produces specialized, independent, nonagricultural commodity production in the form of the crafts.

(3) Accumulation of fixed capital derived from trade, plunder and usury.

Among the basic analytical-descriptive rationales of capitalism that Marx emphasizes are:

(1) The capitalists use the economic power derived from their ownership of the means of production to extract and appropriate surplus value from laborers which is used to finance further accumulation.

(2) Technical innovation enables the capitalist to raise the rate of profit and/or undercut competitors. The consequent development of the productive forces is the positive aspect of capitalism.

(3) Meanwhile, capitalist competition also undercuts and destroys all precapitalist producers (artisans, peasants) as well as the less efficient capitalists (Marx, Capital, I, 1867: 480-93, 709, 927-35, 1037-8).

Marx's realist, materialist[136] description of the metamorphosis thus entails:

(1) Primitive fixed capital (not wealth) accumulation.

(2) Institutional change.[137]

(3) A reserve army of unemployed.

(4) Commodity production (for exchange not use value).

(5) Labor saving machinery (manufacture-machinofacture transition).

(6) New techniques and organizations.

(7) Cash nexus.

(8) Rising organic composition of capital (OCC).[138]

(9) Expansion of trade (both capitalist and underdeveloped countries gain from exchange, albeit the former exploit the latter).

(10) Concentration of production and productive power of capitalism (Capital, I, 1867: 714, 775, 873-940).

Evgennii Preobrazensky (1965), with more of a practical and planning bent, worked on Marx's thought in the 1920s, originating the conception of both the nature and strategy of socialist metamorphosis. A key objective is to maximize the rate of growth of national output. Meanwhile the traditional, subsistence oriented sector and the wage labor based, profit oriented sector are replaced by the private sector and the public (state) sector, respectively (Preobrazensky, 1973: 35-79). The way to achieve socioeconomic metamorphosis is rapid industrialization,[139] to be financed by what Preobrazensky (1965: 183) termed "primitive socialist accumulation": The unequal exchange of resources between industry and agriculture to the benefit of the former.

The state takes responsibility for a steadily increasing share of national production, not only to ensure the socialist metamorphosis of the economy, but also to maximize the rate of growth of output, for the state could fix the savings rate from its expanding, modern sector profits, up to one hundred percent, and it could also determine the pattern of investment to be financed by these savings.[140] However, in the early years of the metamorphosis, concedes Preobrazensky (1973: 115-19), the economy would also need the support of private producers, whose relative and absolute importance should later steadily diminish. The public sector could be expected to generate a faster growth, and more efficient pattern, of investment.

Preobrazensky, like G. A. Feldman who later gave a formal statement of the same argument,[141] favored assigning priority to investment in heavy industry --capital and intermediate goods. This not only would provide means for the production of armaments to protect[142] the metamorphosis, but also in purely economic terms it would provide the basis for maximizing long-term output growth. While the populace might have to tighten its belts in the short-run, foregoing any immediate rise in per capita consumption while the basic industrial structure was created, in the long-run both annual levels, and the rate of growth, of output of all types would be higher under heavy industry investment than under any alternative growth path.

Preobrazensky (1973: 122-47) also explored the policy implications of seeking to maximize the rate of expansion of the public sector, proposing a number of measures to accelerate mobilization of both financial and real resources for state accumulation. These policy instruments include taxation, interest rate policy, the terms-of-trade between sectors and public utility pricing.

Thus Preobrazensky advocated the following policies:

(1) The state should tax the private sector.

(2) The banks should charge higher interest rates to private borrowers than to state industry.

(3) The state should replace private intermediaries in trade, and should set the terms-of-trade between the private and the public sectors so as to permit extraction from the former of part of its surplus products.

(4) The state should charge higher rates to private users of such services as the railways.

The Marxian metamorphosis reaches a sophisticated degree of realism in the work of Maurice Dobb. Dobb (1963: 27-34), with empirical eyes on the socialist, especially Soviet, industrialization experience, addresses the counterfactual question of whether social unity would be ruptured if too much political and economic pressure were exerted on the peasantry to provide, from their labor and their own narrowed consumption, the wherewithal for industrial expansion. His answer is that if encouragement were given to the richer farms to buy or rent more land and employ labor in order to produce a surplus for the market, this would lead to a rebirth in the country side of a capitalist class of improving farmers, accumulating capital and catering for trade and money lending, as have embryo capitalists from the ranks of peasant producers the world over (e.g., English yeomen, French laboureurs, Prussian junkers, Russian kulaks).[143]

The pattern of development for capitalist countries in the past was to develop first all consumer goods industries, such as textiles, clothing or food processing, only switching over to a more rapid expansion of capital goods industries at a fairly advanced stage. This has come to be known as the policy of textiles first. If the peasantry can be wooed rather than coerced into providing a larger marketed surplus of raw materials and foodstuffs, this pattern would be the right one, since the only way of tempting a peasant to sell more grain or cotton is to offer him/her more industrial goods in return, and to make this possible an expansion of light consumer goods industry would be given priority. This would be enacted in a cautious and relatively slow development process, in the course of which a careful balance must be preserved between agriculture and industry production of more consumer goods, keeping in step with a quickened flow of agricultural products from village to town.

The actual Soviet way of metamorphosis, however, was to combine a high rate of industrialization with a drive for collectivization of agriculture --for the merging of individual peasant farms into large scale cooperative or collective farms. Thereby a solution was provided for two problems. The first, a historically specific one, namely the individualist peasant agriculture, with its primitive methods and low yields, and its constant threat of a “reborn capitalism” via the generation of an upper kulak stratum of farmers, was replaced by a collective form of agriculture. At the same time, but more importantly, the basis was laid for mechanization and an enlargement of the marketed surplus.

Industrial metamorphosis, therefore, rather than being slow and cautious, was planned to take place at an ambitiously high rate. The impetus of metamorphosis was not to be allowed to peter out; on the contrary it was to be generated and sustained by a campaign to which the leading personnel in industry at all levels and the full membership of the Party were mobilized. The cautious pattern of development was discarded, and instead of light industry taking the lead, priority was given to the construction of heavy industry --electrification, iron, steel and machinery. By enlarging the productive capacity of the metal, power and machine making industries the possibility of the future expansion in all branches of the economy was thereby being enlarged. Such a Marxian based Soviet experimentation, its political tyranny and human cost aside, provides economic precedents for the UDCs to consider in their quest for transformation. For example, in the absence of a heavy industry (fuel, metals, engineering) the UDCs will have to rely in the early stages of metamorphosis on importing machinery from abroad with which to equip their new industry. Meanwhile, they will have to export primary products, at whatever prices there are, to procure that machinery.

Another practical issue of relevance to underdeveloped countries from Marxian metamorphosis is whether to yield to Preobrazensky's counsel and leave some strategic segments of the metamorphosis to the initiative of private capitalists, aided perhaps by some foreign lending and technical aid under the umbrella of international bodies; or whether planning in some degree by the state and by government organs is necessary.[144] The adoption of the latter of these two positions in the UDCs, even within a continuum or middle ground strategy, inevitably results in the state having to face internal as well as external reactions hostile to any encroachment on a free market economy, and to any considerable enlargement of the scope of state expenditure and investment, with the potential security problems thereof. This in turn discourages private initiative, results in capital outflows, scares away foreign capital and leads to uneconomic policies and to waste involved in economic planning. The tradeoff for such a course of action, elaborated on below, however, is so important that finding ways to mitigate, if not resolve, or absorb these shortcomings, is imperative.

In addition to this broader issue of planning versus free market, state versus private investment, especially in the strategic segments of the economy, there is of course, still lingering, the question of the general lines which metamorphosis, planned or unplanned, should pursue. It could pursue the policy adopted by some developed countries in the past, proceeding cautiously to invest first in agriculture and agricultural processing industries, then in light consumer goods industries for which there is an immediately available market, and only much later in highly mechanized modern techniques and in heavy industry. Or, alternatively, it could pursue the heavy-industry-first approach.[145]

In this question of the pattern of metamorphosis a number of distinct though connected issues are involved: The relative importance to be assigned to foreign trade and to mobilizing internal resources, especially surplus labor; the order of priority to be assigned to different industries or sectors --their relative rates of growth at particular periods; and the choice of technique, or of methods of production, in the economy at large and in particular industries. These issues are difficult to size up clearly without entering into specific case reasoning, and in the process to focus upon essentials, something that is utterly difficult, especially in the muddled state of the data base and statistical nuances and lack of reliability in conditions of underdevelopment. But such complementary country studies will have to be made if the proper balance is to be achieved.[146]

The wider issue of growth, however, is relatively straightforward. Assuming that population is increasing at 2 percent per annum, which is not an unusual rate for UDCs, and assuming a capital-output ratio of 3, a country will have to save and invest 6 percent of its national income merely to break even, i.e., to keep pace with population increase while preventing the standard of living from falling. To maintain an economic growth rate of 5 percent, and hence raise output per capita by as little as 3 percent per annum, will require the investment annually of 15 percent of its national income --a very high percentage, and hence too heavy a burden, for UDCs with such very low output per capita and already so near the starvation level.

Dobb (1963: 40-1) provides a rather obvious answer, or at least partial answer, to this: That in most UDCs there are large inequalities of income, and hence a substantial amount of parasitic consumption by feudal and other well-to-do elements (a lot of it of imported goods), which could be reduced if appropriate governmental measures were adopted. For a principal obstacle to rapid economic growth in the UDCs is the way in which their potential economic surplus is utilized. The UDCs’ surplus is absorbed by various forms of excess consumption of the limited number upper class, by increments to hoards at home and abroad, by the maintenance of vast unproductive bureaucracies and of even more expensive and no less redundant, mostly ceremonial, military establishments, whereby the state --also under constant security threats-- too often means the army, the only “national” institution. Moreover, there are often untapped resources and forms of waste, and these resources could be mobilized legally (i.e., with proper compensation) for investment by a government not too tender about existing vested interests. That does not mean dictatorship; it only means balancing conspicuous consumption with urgent needs, the privileged oligarchy with the destitute masses, and the utterly unjust with the fairly just.

The pessimistic view[147] takes it for granted that, in order to have rapid metamorphosis, consumption must be depressed absolutely so that the investment ratio may be raised. This, in Dobb's account, is a purely static view, and derives from the snap shot habit of looking at things at a given point of time, with a given total income to be divided in certain proportions between consumption and investment (Dobb, 1963: 41-2). What this static view overlooks is that growth depends quite as much (and in the long-run much more) on what is done with the increment of national output, however small this may be to start with, as on whether the initial rate of investment (and hence rate of growth) is large or small.

In other words, it is the rate of increase of the increase --the capacity of the growth rate itself to grow-- that really matters. It is how one uses the investible surplus one has, and how one harnesses its results, that is crucial, rather than its initial size in year one (the neoclassical so-called “endowment”). True, using the increment for rapidly stepping up development involves not using it to increase consumption for the time being. But to partially forgo raising consumption here and now in order to be able to raise it more rapidly later, is a different thing from absolutely reducing consumption here and now which the pessimistic view sees as the only possibility.

From a planning standpoint, this issue appears essentially as the question of how to distribute investment between industries that make capital goods and industries that make consumer goods. Instead of the notion that savings, as a painful shrinkage of consumption, must always precede and condition growth, there is the notion that the increment that growth yields being used in various ways, with varying effects on growth in the future, result in a staggering force of compound growth at high rates.[148] This is the practical crux of Dobb’s Marxian contribution, for his many profuse trees are all encompassed within this crowning forest.

1.3 The Keynesian Mechanism

Before Keynes, the prevailing orthodoxy was that the economy tended to a full employment equilibrium through the operation of the price device, with the distribution of income determined by the payment to factors of production according to their marginal productivity. Economic growth was assumed to be a smooth continuous process. The twin pillars of classical employment theory were that savings and investment were brought into equilibrium at full employment by the rate of interest, and that labor supply and demand were brought into equilibrium by variations in the real wage. Anyone wanting to work at the prevailing real wage could do so.

In the 1930s the problem that dominated the capitalist economies was that of intense, persistent, trade depression associated with widespread, unprecedentedly heavy unemployment which was aggravated rather than relieved by laissez faire economic policies. Britain, the last stronghold of free trade at that time, therefore, adopted a protectionist strategy in the 1930s. And in the United States, the proverbial home of methodological individualism, the New Deal licensed an unprecedented level of government activism.

The ideological bias associated with the neoclassical paradigm was becoming an anachronism (Keynes had consigned the laissez faire ideology to the lumber room of "vulgar economics" as early as November 1924),[149] and Robbins' view that the cause of economic difficulties since the Great War was due to wages being held above the equilibrium level, though still shared by many economists, provided little practical guidance to policy makers.

This then was the context in which Keynes produced his General Theory of Employment, Interest and Money (1936), which he viewed as a complete break with current orthodoxy.[150] Keynes took issue with what he chose to call "classical" theory but which embraced neoclassical theory.[151]

A major objection to orthodox economic theory in the context of the 1930s was that it assumed an economy which was tending towards full employment --not of course that the economy was necessarily in a position of full employment, but that its eventual equilibrium was a full employment position. However, in the prolonged depression of the interwar period, with rampant unemployment, the assumption seemed blatantly to disregard the crucial problem of economic policy. It was thus the classical theory of employment with which Keynes took issue first --in his second chapter of the General Theory, which is a critique of what he chose to specify as the postulates of classical economics. These in his account were fourfold:

(1) That the real wage is equal to the marginal product of labor.

(2) That the real wage is equal to the marginal disutility of the existing employment.

(3) --Which is a logical corollary of (2)-- That there is no such thing as involuntary unemployment in the strict sense; i.e., that all the unemployed could get employment merely by accepting a fall in wages.

(4) That supply creates its own demand in the sense that the aggregate demand price is equal to the aggregate supply price for all levels of output and employment (Keynes, 1971: 9).

With the first of the postulates he did not quarrel. With the second and its logical corollary, the third, he came into head on clash. The implication of the second classical assumption, that the real wage equals the marginal disutility of labor, is that an individual could increase his employment by revising his notion of the disutility of labor and accepting a lower wage. At a macroeconomic level it implies that if labor as a whole would agree to a reduction of money wages more employment would be forthcoming. Keynes' objections to these assumptions were based partly on an appeal to facts: It was not plausible to assert that unemployment in the United States was due either to labor obstinately refusing to accept a reduction of money wages, or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing.[152]

In the General Theory Keynes strove therefore to demonstrate that contrary to the classical theory the capitalist system left to itself will not generally produce full employment. The key to this theoretical formulation was the development of two concepts, liquidity preference and effective demand. Liquidity preference meant that financial markets may systematically cause interest rates to be at such a high level that they depress private industry investment, and that the demand for the stock of money depends on the rate of interest. Effective demand is the notion that aggregate demand, and hence savings, depend on disposable income.[153] Consequently, full employment may be unsustained because its level of output is not matched by aggregate demand. It stands in contrast to the classical or, more accurately, neoclassical view that the price device automatically adjusts to ensure equality between demand and supply, for instead of demand responding only to prices it responds to income.

Keynes was thus confronted not only with the theoretical challenge but mainly with the factual challenge of the large scale unemployment of the 1930s itself. He posited that the working class and the labor unions would show less resistance to a slow erosion of real wages, with a rising level of nominal wages and of inflation, than to a lowering of nominal wages under stable fiduciary (paper) money. His macroeconomic approach thus is less a grand construct than a pragmatic device for pursuing a given purpose: Namely to influence decisively the shaping of economic policies by the government. His ideas were experimented with during Roosevelt's New Deal and were put into practice in all OECD countries after World War II.

What was lacking was a model of economic reality which started from the facts of experience, i.e., a system with a persistent tendency towards something less than full employment. Keynes thus developed a theory in which the level of employment depended on:

(1) The propensity to consume.

(2) The marginal efficiency of capital.

(3) The quantity of money.

(4) The level of wages and prices.

The key factors in the system were:

(1) The principle of effective demand, which acted through the propensity to consume and the rate of new investment to set a ceiling to the level of economic activity.

(2) The role played by money as the link between the present and the future.[154]

Keynes then tackled an empirical question about market economies, the causes of wide swings in economic activity, particularly of long slumps.[155] His thesis in the General Theory is that the valuation of assets is sometimes disturbed by a massive shift of business or financial opinion and, in response, the labor market is not generally able to adjust rapidly and dependably so as to maintain the normal volume of employment, not because of any slow workingness in the wage setting machinery --wages may be quite flexible-- but because the participants in that market cannot assess every shift in business or financial opinion that occurs nor the scale of the wage adjustment that each such shift requires.[156]

The theory chosen by Keynes thus was:

(1) Monetary, assigning a crucial role to the current level of nominal wages.

(2) Intertemporal and capitalistic, assigning a key place to fluctuations in the rate of interest, or marginal efficiency of capital, as determined in a two sector economy.

(3) Anti-equilibrium, in the expectational sense of the term, invoking uncertainty as an obstacle impeding expectations from successfully coordinating business activity.

(4) Interventionist, depicting monetary and fiscal instruments as having the power to improve the stability of the economy.

Spelling out the propagation agency to show how instability in the speculative valuation of capital assets would lead to episodes of below average and above average employment, Keynes made a three step argument:

(1) A decline of speculative confidence --a drop, calculated at the initial level of employment, in what Keynes dubbed "the marginal efficiency of capital"-- implies that there would have to be an equal decline in the nominal rate of interest, if the product market were to remain in equilibrium at the initial level of employment.

(2) If the condition for money market equilibrium is to be satisfied a decline of the interest rate, in increasing the amount of money demand, must be accompanied by a fall of real income, barring an increase of the money supply, unless the disturbance is accommodated by a decrease of the nominal wage level (hence of costs and prices).

(3) Nominal wages do not initially drop by enough, if at all, to forestall the fall of employment because workers in establishing their reservation money wage rates, do not forecast adequately the extent and generality of the weakening of the demand for labor; and they do not complete at all promptly the adjustment necessary to return to the former employment level for reasons that Keynes did not make explicit, but which may be presumed to involve workers' difficulties in gauging the extent and duration of the speculative disturbances. So there is a protracted spell of reduced employment as a result of the marginal efficiency disturbance (Keynes, 1971: 28-31, 135-41).

This Keynesian agenda had been attacked from its earliest days as socialist, although its avowed role was the preservation of capitalism; but ultimately it was undermined by changed circumstances more than by political attacks on it. The Keynesian dominance constructed after World War II lost its cohesion in the late 1970s, as the international order anchored by the US dollar (the Bretton Woods monetary system) gave way to a less regulated international finance, and the social consensus of domestic politics in industrial capitalist countries was fragmented by the phenomenon of high inflation coexisting with high unemployment (stagflation).[157]

The monetarist criticisms voiced by Milton Friedman et al. for many years took a new line at the end of the 1960s by interpreting Keynesian theory as depending on the Philips Curve, which was proposed in 1958. Friedman gave the latter a neoclassical foundation by introducing expectations of inflation into a model of wage determination, and obtained the anti-Keynesian result that in the long-run unemployment, however high, is at its "natural rate"[158] reflecting workers' choice instead of being involuntary and is not influenced by Keynesian demand management policies. Because the dominant form of the Keynesian model itself was based on neoclassical principles, its supporters were unable to argue effectively against this extension despite its anti-Keynesian conclusion. Keynesianism was eventually overturned as an official agenda in the 1980s, when Margaret Thatcher gained power in Britain and Ronald Reagan took the helm in the United States. The fundamental Keynesian objective of permanently eliminating mass unemployment was lost in that period.[159]

But in pressing on economists the uncertainty of future conditions, the difficulty of gauging the analyses of others, and the consequent impossibility of a collective mind and collective rationality, Keynes was a bearer in economics of both the intellectual attributes of his time and of measured eclecticism. His outlook paralleled[160] what was turning up in much of art and philosophy --in the cubism of Picasso and Braque, the atonalism of Schoenberg and Berg, the fragmented poetry of Eliot and Pound, and various writings from Nietzsche to Sartre. Keynes brought to economics the outlook generally called modernism:[161] The consciousness of the distance between self and others, the multiplicity of perspectives, the end of objective truth, the vertiginous sense of disorder.

The class of Keynesian research problems thus have as their subject the traverse from the old equilibrium path to the new one. Recovery is as much the subject as the recession itself. However, when Europe and much of the rest of the world suffered a protracted depression in the 1980s this phenomenon was not a Keynesian story. The Keynesian theory was unable to explain the protracted 1980s slump.[162] The portrait that Keynes' theory drew of the economy, one in which labor market participants faced daunting uncertainties about the extent of the general fall of wages that will prove necessary to restore employment, and about the extent to which other wage setters have reached the same calculation, hardly seems a propitious environment for government authorities to try their hand at stabilization. And indeed Keynes says in the General Theory that even optimal policy decisions by the stabilization authorities will inevitably leave a large amplitude of fluctuation in employment. Yet Keynes was no passivist in the battle over policy.[163]

In its broadest sense Keynesianism is an approach to the political, social and economic affairs of industrial capitalism that validates the state taking a leading role in promoting material welfare and growth, and in regulating civil society. The fundamental idea of Keynesian thought is that capitalist economies systematically fail to generate stable growth or fully utilize human and physical resources. Markets, which are civil society's main economic agents of self-regulation and adjustment, cannot eliminate economic crises, unemployment or, in later versions, inflation. The iconoclastic conclusion of Keynes’ analysis was that there was no Smithian invisible hand translating private self-interest into social benefit. This was the nub of the Keynesian heresy.[164]

But the principle reason why the General Theory had such a powerful impact on the community of professional economists inside and outside the universities, internationally as well as in Britain, was that the time was ripe. Its abstractions seemed more relevant to the conditions of the 1930s than the competing theories. Its analysis gave a theoretical basis for policy prescriptions that were more in tune with existing political trends in a world that was already in massive retreat from a laissez faire[165] ideology. It thus attracted the interest of economists over a very wide spectrum of political affinity.[166]

The Keynesian project gained political and social momentum, then, from intractable mass unemployment in the 1920s, culminating in the crises of the 1930s, which put the legitimacy of the capitalist order in doubt and appeared to threaten that it could collapse into anarchy or give way to socialism. Keynesianism seemed to offer a "third way" between laissez faire capitalism and socialism;[167] by transforming capitalist society, Keynesianism would strengthen and preserve it.[168] Keynes thus accepts the logic of the capitalist system and places his proposals squarely within that framework.

The General Theory was thus taken to justify deficit spending to stimulate employment. Keynes contended that poverty and "the economic struggle between classes and nations," which could produce war,[169] could be overcome by social reorganization. Rejecting "state socialism," he held that capitalism safeguarded personal liberty and promoted efficiency through decentralizing decisions and appealing to self-interest. But the economic anarchy of laissez faire capitalism did not ensure full employment or sufficient equality of income and wealth. Keynes thus stressed the control of economic processes to achieve desirable objectives, and perhaps took for granted the political feasibility of his recommendation. He favored a world bank and international currency. He urged the government to stimulate consumption, encourage capital good production and invest in public works[170] rather than waiting for automatic forces to revive employment. This required collective action. An enlargement of the functions of government, especially through semiautonomous agencies, and greater governmental control over savings and investment, through low interest rates and public work programs, were the techniques he proposed to promote "social justice and social stability." This would preserve a modified capitalism in which Keynes hoped pecuniary motives would diminish in importance, an orientation diametrically opposed to that of neoclassical economics.

1.4 The Traditional Mechanism

Official DCs' policy towards development after WW II was based on the premise that the West had gone through a process of modernization whilst the rest of the world was held back in the grip of traditional social forms. A sociological basis for this had already been formulated and become widespread in the ideational works of some of the modern realizers of the discipline. Emile Durkheim (1960) and Ferdinand Toennies (1974) both distinguished between the preindustrial and the industrial worlds in terms of different forms of social solidarity, whilst Max Weber (1954, 1958, 1971) drew up his ideal types of social action and legitimated authority to accommodate generalized features of all societies, which can then be seen as skewed towards tradition in the old world and rationality in the new. These are dichotomous versions of a general concept of social evolution, advocated by modernization theory, through which societies are seen as progressing along a pathway of development or modernization from a traditional to a modern stage. Indeed, the notion of aid to the UDCs is modernization theory operationalized. Official aid agreements always have conditions in them upon which the receiver is expected to conform to whatever version of capitalist economics that is considered orthodox in the West at the time. Development aid, however, has been more of a politico-military device than an economic one (Spybey, 1992: 33-7).

More important, the universalistic pretension of classifying all societies that do not follow the Western pattern as nonrational and traditional (à la Weber) is teleological. The binary categories of rational-irrational, modern-traditional are inadequate tools for dealing with the empirical plurality of rationalities and diversity of sociopolitical values and behaviors.

Besides the works of Durkheim, Toennies and Weber, however, there are a number of other clear examples of this evolutionary form, some of them from the nineteenth century, as exemplified by the work of Auguste Comte (1896) and Herbert Spencer (1972), and others from more recent times such as that enshrined in the overarching theoretical synthesis of Talcott Parsons (1977).

But perhaps the best example of evolutionary modernization theory, because of its direct association with policy formation, is Walt Whitman Rostow's Stages of Economic Growth (1960) which uses for a baseline the British industrialization episode as the archetypal case of economic development.

Rostow utilizes the sequential theory of history to provide a recipe of sharp stimulus, and propulsive, export leading sector which catapults an economy into "takeoff" (unbalanced growth but with no despair: It is possible for all latecomers; growth is to be measured not by GNP but by the absorption of extant technology). Rostow's ideational vision stipulates that growth can be achieved in five stages, of which the three fundamental

ones are: Preconditions for takeoff, takeoff, and self-sustained growth, in an aided global strategy of harmonious DCs-UDCs cooperation for the containment of nationalistic violence as well as Communism, to enable the "democratic way of life" to persist and develop.[171]

For Rostow, like Lewis as is discussed below, a crucial factor which serves to lift an economy out of low income stagnation on to a sustained growth path is a significant increase in the share of savings and investment in national income. For this to occur a new class of entrepreneurs/businesspersons must emerge. Further, to desegregate the nature of the growth process, Rostow introduces the concept of the primary, or leading, sector, which plays a key role both during the takeoff and subsequently (Rostow, 1956: 73-125).

The sectors of an economy are grouped into three categories:

(1) Primary growth sectors, where possibilities for innovation or for the exploitation of newly profitable, or hitherto unexplored, resources yield a high growth rate and set in motion expansionary forces elsewhere in the economy.

(2) Supplementary growth sectors, where a rapid advance occurs in direct response to, or as a requirement of, an advance in the primary growth sectors; e.g., coal, iron and engineering in relation to railroads.

(3) Derived growth sectors, where advance occurs in some fairly steady relation to the growth of total real income, population, industrial production or some other overall, modestly increasing parameter. Food output in relation to population, and housing in relation to family formation, are exemplary derived relations of this order.

At any period of time, forward economic momentum is maintained as the result of rapid expansion in a limited number of primary sectors, whose expansion has significant external economy, and other secondary, effects. From this perspective the behavior of sectors during the takeoff is merely a special version of the growth process in general; i.e., growth proceeds by repeating endlessly, in different patterns, with different leading sectors, the experience of the takeoff. Like the takeoff, long-term growth requires that the society not only generate vast quantities of capital for depreciation and maintenance, for housing and for a balanced complement of utilities and other overheads, but also a sequence of highly productive primary sectors, growing rapidly, based on new production functions. Only thus can the aggregate marginal capital-output ratio be kept low.

Achieving satisfactory growth, in balance with rising demand, in the derived growth sectors, requires the diffusion of technical innovations in these sectors too. Thus changes in agricultural technology are also essential for successful takeoff, for modernization of a society increases radically its bill for agricultural products. Examples of leading sectors in the takeoff include the textile industry in Britain; railway development in the United States, Germany and France; the timber industry in Sweden; and armaments production in Russia.

The Eurocentric nature of Rostow’s underlying concepts is indisputable. His formula is a generalization of the case, i.e., the British. It is generally accepted by the modernization school. His analysis is rooted in the work of the German Historical School of Economics --including List, Hildebrand, Bücher, Roscher, Schmoller, and Sombart. It is, in one way or another, commensurate with François Perroux's (1983) Propulsive Industry and Growth Pole --pôle de croissance; Everett Hagen's (1975) Impetus for Growth (the order of economic advance is the reverse of the degree of contact with the West: Japan, China, India, Indonesia); Simon Kuznets' (1966) Entrance into Modern Economic Growth (with population growth, or at least stability); and Margaret Mead's (1953) Purposeful Change.

Not one concept in all of the above directly pertain to, much less originated from, the concrete socioeconomic problems of twentieth century UDCs, Hagen's endeavor notwithstanding. It is no wonder therefore that this Eurocentrism, an offshoot of the ideological construct of capitalism and a form of epistemological imperialism, claims that imitation of the Western model (supposedly laissez faire plus electoral democracy) by all peoples is the only solution to the challenges of underdevelopment.

Insofar as agriculture has been a focus of attention in traditional development economics, the reasons for this interest have been more diffuse than the pre-Marxian analysis of diminishing returns. The focus has shifted in respect to the role of agriculture in surplus generation, equity and employment creation, demand stimulation for the industrial sector and foreign exchange generation. William Arthur Lewis (1954, 1955, 1984) elaborated on his outlook of the Complementarity of Industry and Agriculture (which provide markets for each other's output), with highly elastic labor supply (furnished by the traditional, agrarian sector to the modern sector) in an unbalanced growth process within a democratic framework of social provision.

This complementarity can be augmented by the use of Ragnar Nurkse's (1952: 10-13) concept of surplus/seasonal labor with minimal equipment for rural capital formation: building roads, bridges, irrigation channels, terraces, antierosion barriers, etc. This use would result in no significant fall in other output and hence be costless in real terms (the inflationary pressure resulting from increasing the money supply being damped by the increased propensity to save, as an outcome of increased output of mass consumer goods which is in turn caused by the productive use of surplus labor).

Disguised unemployment, in Lewis' (1954: 24-5) account, is caused by a basic deficiency of the supply of complementarity inputs, such as arable land and physical capital, relative to the population and potential labor force, and not to a deficiency of Keynesian aggregate demand. Disguised unemployment results in too little labor being employed in the modern manufacturing sector because wages are above the social opportunity cost of labor in agriculture.

Lewis equates the steady expansion of the capitalist sector with economic development. However, he too contends that the working population cannot expect an immediate rise in living standards if capitalist growth is to be maximized. Meanwhile, capital export may slow down capitalist growth, although in principle at least there may be some scope for policy control of such outflows. Lewis' economic growth and development are thus equated: High growth now accelerates the transition to higher mass incomes in the future.

His starting point is an economy with unlimited supplies of labor at a subsistence wage. This labor is to be found in various branches of the economy, chiefly in traditional agriculture, but also in the urban sector. Such labor surplus economies can be analytically divided into two sectors: the capitalist sector and the subsistence sector. The former is very small, the latter large. The capitalist sector is that part of the economy which uses reproducible capital, and pays capitalists for the use thereof. Capitalist production occurs in mines, plantations and industry. The subsistence sector in contrast does not use reproducible capital, and output per capita is consequently much lower. It is also based upon family labor rather than hired labor (Lewis, 1955: 65-75).

Labor is available to the capitalist sector at a wage that is determined by earnings in the subsistence sector. Since individuals in this sector generally work in household enterprises, and/or pool their earnings with other household members, their effective income reflects the average, rather than the marginal, income of household members. It is thus average per capita income (which Lewis equates with average labor productivity) that is the material opportunity cost to a laborer of moving from the subsistence to the capitalist sector. The wage paid by the capitalist sector is set at the level of this opportunity cost plus a margin which is just sufficient to induce workers to move into wage employment.

The fact that the wage level in the capitalist sector depends upon earnings in the subsistence sector is sometimes of immense political importance, since its effect is that capitalists have a direct interest in holding down the productivity of the subsistence worker's income. For example, the imperialist record in Africa is one of impoverishing the subsistence economy, by taking away land, or demanding forced labor, or imposing taxes to force people to work in the capitalist sector at the prevalent wage (Kwame Nkrumah, Neocolonialism: The Last Stage of Capitalism, 1965: 35-62).

For Lewis, the fundamental constraint to growth in output is the lack of accumulation of productive capital, including knowledge and skills with capital, because of low rate of savings. Only when the share of profits in national income increases will the share of savings increase. Where a capitalist nucleus exists, however small, and where there is an unlimited supply of cheap labor, then the capitalists will reinvest at least part of their profits, thereby expanding the capital stock. More labor is then drawn into the capitalist sector. With each round, as the surplus is reinvested, total profit increases. With wages in the capitalist sector remaining at subsistence level, the share of profits in national income rises as the capitalist sector expands.

As the share of profits rises, the share of savings and investment in national income rises too, thereby increasing the rate of economic growth. Hence the limited savings problem which confronts underdeveloped countries is not because they are poor, but because their capitalist sector is too small. It is important to note that capitalist here does not mean private capitalist, but would apply equally to state capitalist. The latter can accumulate capital even faster than the private capitalist, since it can use for that purpose not only the profits of the capitalist sector, but also what it can force in taxes out of the subsistence sector.

Private or state capitalists are often imported. If they do emerge internally, this is probably bound up with the emergence of new opportunities --especially something that widens the market-- associated with some new technique which greatly increases the productivity of labor as labor and capital are used together. Once a capitalist sector has emerged it is only a matter of time before it becomes sizable. If very little technical progress is occurring, the surplus will grow only slowly. But if for one reason or another the opportunities for using capital productively increase rapidly, the surplus will also grow rapidly, and the capitalist class with it.

Expansion of the money supply and an associated price inflation, argues Lewis (1955: 78-91), can accelerate the rate of growth in a country with surplus labor when credit is created in favor of private capitalists, or when it is used to finance government capital formation, provided that the projects financed generate increased output fairly quickly. The inflation of monetary demand and prices will be liquidated as new goods begin to flow into the market. Furthermore, in labor surplus economies, output expansion financed by monetary expansion need not entail withdrawing land and capital from other uses (as assumed in the neoclassical theory), since there is significant scope for infrastructural capital creation using labor intensive methods --e.g., roads, viaducts, irrigation networks.

However, three factors may constrain the effectiveness of monetary expansion as a growth promoter:

(1) If prices rise too fast, or for too long, investors may lose confidence and turn to private forms of unproductive investment such as speculation in commodities and land purchase. (2) The smaller the capitalist class the greater the likelihood that much of the expanded money supply will find its way into the pockets of other groups (such as merchants who speculate in commodities; the general middle strata, who surrender to the demonstration[172] effect; or peasants who buy more land).

(3) In an open economy, expansion of monetary demand would put pressure on the balance of payments (Hunt, 1989: 305-7).

Therefore, only if the balance of circumstances is favorable, and the authorities can contain the pressure on the foreign balance while ensuring that the monetary expansion leads to a significant increase in investment, should monetary expansion be used as a means of accelerating growth.

That government try to control price inflation by fixing industrial prices is not recommended by Lewis, since it is the industrial capitalist class that saves most. Industrial price controls reduce profits, and therefore savings and investment, while perpetuating inflationary pressures. However, the emphasis on an overriding savings constraint to development, as Hunt (1989: 108) points out, and as has Dobb above, ignores the possibility that investment is constrained not by lack of savings but by lack of demand (as the recent/current Japanese case may suggest).

Also, while Rostow, like Lewis, does give some attention to the inducement to invest, he does not treat this as an overriding constraint. Yet if the overriding constraint is lack of inducement to invest, pursuit of many of the policies advocated by Lewis can exacerbate the problem. For example, use of capital intensive techniques limits domestic market expansion in three ways:

(1) By constraining the growth of domestic demand.

(2) By concentrating income increases in the hands of upper income groups with a high marginal propensity to consume imported goods.

(3) By making it virtually inevitable in most countries that capital goods will have to be imported, thereby reducing backward linkages (Hunt, 1989: 108).

Moreover, sustained economic growth, according to Lewis, is possible so long as there is an initial capitalist nucleus and an abundant supply of labor at subsistence wages. The capitalist surplus will then be a rising proportion of the national income, but the process will slow down and finally come to a halt when the capitalist sector has absorbed all the surplus labor. Wages will then inevitably rise, eating into profits and reducing the incentive to invest. When the labor surplus disappears, the closed economy model no longer holds.[173] The process may also be brought to a premature halt if wages rise prematurely.

This may happen for one of four reasons:

(1) If the rate of labor absorption in the capitalist sector exceeds the rate of population growth in the subsistence sector. In this case the number of people in the subsistence sector will begin to fall, and even though subsistence output at first remains constant, their average product will rise and so will the supply price of labor.

(2) If the capitalist sector buys goods (e.g., food) from the subsistence sector and if the supply of marketed output from this sector is price inelastic, then as the capitalist sector grows the terms-of-trade may turn against it. This will force the capitalists to devote a larger proportion of the value of their output to the payments of wages in order to sustain the real subsistence value of the wages.

(3) Subsistence producers may adopt certain of the improved production methods introduced by the capitalists (e.g., new seeds or crop varieties), thereby raising their average productivity and so also the supply price of labor.

(4) Industrial workers may seek to enjoy the living standards of their employers, and so bid for higher wages (Hunt, 1989: 92-3).

Furthermore, when productivity rises in capitalist plantations and mines producing for export in poor countries this is not followed by a wage increase. Wages remain determined by the supply price of labor, and all the benefits of the productivity increase are passed on to consumers in rich countries in the form of lower prices. However, as Lewis points out (1955: 92-5), in agreement with Marx’s contention referred to above, this is not to say that the underdeveloped countries gain nothing from having foreign capital invested in commercial production for export. They gain an additional source of employment and of taxation, but this is not the whole issue; it is only part of the picture that is more than offset by its collateral cost when the entire gamut of the transformation, not merely subsistence employment or even per capita GNP, is taken into account.

On the other hand, because labor in the subsistence sector is paid its average, and not its marginal, product, concedes Lewis (1955: 97-9), the application of the theory of comparative advantage is usually distorted in underdeveloped countries. Given diminishing returns to labor in the subsistence sector, the wage paid by the capitalists exceeds labor's true social opportunity cost. Capitalist accumulation may also be slowed down by the distorted operation of the theory of comparative advantage (due to the mode of determination of subsistence incomes), unless the government introduces compensatory measures. Lewis thus suggests that governments provide tariff protection to entrepreneurs in such economies as a means of compensating them for this cost distortion.

Industrialization occurs, according to the combined Lewis-Rostow Thesis, when countries increase investment from about five percent to approximately twelve percent of national income (because contrary to the comparative statics of neoclassical economics, which is essentially concerned with the allocation of the given resources, so-called “endowments,” economic development is dynamic and concerned with increasing the supply of investible resources through a greater rate of savings and investments).[174]

But whereas Lewis presents a process of expanding capitalist accumulation which over time absorbs the labor force of the traditional sector, Rostow points out the political, social and institutional changes likely to be associated with the takeoff, as well as the likely leading sectors in this process. While Lewis focuses on the interaction of declining rural underemployment and increasing capitalist accumulation, Rostow takes increasing investment, the emergence of a leading high growth sector, and political, social, and institutional change as the three foci of his analysis of the takeoff. Whereas Lewis refers to the key role played by the emerging capitalist class, Rostow, like Schumpeter’s contention presented above, refers to an entrepreneurial class. But Rostow's capitalist entrepreneurs are those whom Schumpeter saw in Britain and elsewhere in the nineteenth century (Schumpeter, 1954), not the distinct category of entrepreneurs of a contemporary industrial society.

In sum, the traditional mechanism, as primarily projected by the Lewis-Rostow Thesis, entails the following concepts:

(1) Economic growth, measured by rising per capita income, is the focal defining characteristic of economic development.

(2) More broadly interpreted, economic development entails the conversion of a traditional, stagnant, subsistence oriented economy into a dynamic, capitalist economy (based on wage labor) capable of self-sustained growth and of providing, in the long-term, rising real wages.

(3) It is possible to specify the common and dominant characteristics of this conversion process for all countries, both those now relatively developed and those underdeveloped, provided that their starting point is a condition of abundant supplies of labor in the traditional sector.

(4) A key determinant of the rate of growth is the rate of capital formation, which is in turn governed by the share of savings in national income.

(5) The capitalist/entrepreneurial class plays a crucial role in capital accumulation, for its members have a higher propensity to save and invest out of their profit income than any other class.

(6) An essential element in the initiation of economic growth is the emergence of a class variously described as entrepreneurial (by Rostow) or capitalist (by Lewis), operating either in the private or the public sector.

(7) In order to maximize the subsequent rate of growth it is necessary to concentrate as large a share as possible of national income in the hands of those with a high propensity to save, i.e., the capitalist class. The aim should be to steadily increase this share over time.

The main policy conclusions that follow from the traditional mechanism are that, in order to maximize the pace of economic development, governments should take the following measures:

(1) Use tax policy to contain premature increases in subsistence incomes.

(2) Restrain the premature development of trade union, wage bargaining power.

(3) Judiciously expand the money supply to help finance capital formation.

(4) Refrain from attempting to control any ensuing price inflation by fixing industrial prices.

(5) Protect the domestic capitalist sector from foreign competition in order to compensate for the distorted operation of the concept of comparative advantage.

(6) Discourage capital exports.

What the traditional development doctrine amounts to, evidently, is a marriage of the theory of marginal productivity of the 1870s with that of comparative advantage, which Ricardo proposed in the early nineteenth century and neoclassical economics used to explain the pattern of international trade from the 1950s onward. According to the former, the price of factors of production that are relatively scarce will tend to be high and the price of those that are relatively plentiful will tend to be low. In this case it is labor that is the plentiful factor and capital the scarce.

Hence by concentrating on methods of production and on industries which are relatively labor intensive, a country will be concentrating on those methods of production and industries which are least costly. And this, the theory of comparative advantage claims, is the most economical way of using a country's resources, i.e., using them to the greatest efficiency. This is held to be better since an UDC would export part of the products of such industries, importing such things as machinery in exchange, then use labor and capital to produce the latter at home.

On this basis there was constructed what amounted to a theory of stages of development. First, a country concentrates on fairly primitive, labor intensive techniques and on industries which from their nature require relatively little capital and have low capital labor and capital-output ratios. In the course of time, as capital accumulates and surplus labor gets drawn into employment, it can graduate towards more capitalist techniques and develop the more capital intensive type of industry. Eventually, as it joins ranks of industrial capitalist countries, so the rationale of the traditional mechanism goes, the UDC can shift towards the production of capital goods, and import its foodstuffs and raw materials and even a lot of its industrial consumers' goods from countries at a lower stage of development.

Thus by design, not default, these lower-stage-of-development countries should never disappear, they are a corner stone of the paradigm, on the basis that this method was the traditional order of development for Western capitalist countries. The emphasis of this traditional mechanism for the underdeveloped countries, therefore, is on primitiveness and gradualism: On following the supposedly "traditional pattern" of nineteenth century European capitalism, and avoiding what is considered a grandiose design of engineers and planners.

Juxtaposing the mechanisms of Marxian metamorphosis and those of traditional development, the latter as a mixture of the classical and marginal theories, nonetheless, illuminates several aspects of the sought transformation. The traditional capitalist doctrine of development emphasizes caution and conservatism. It overemphasizes the fact that an UDC is apt to be characterized by acute scarcity of capital and by surplus labor while avoiding untraditional, innovative possibilities. In these circumstances, inevitably, new investment funds must be sparingly used, and used with maximum effect in harnessing surplus labor to employment and in increasing the national product.

This, accordingly, could best be achieved if investment were devoted, not to expensive machines and more productive technical processes, but to equipping labor with the cheapest possible implements, since with limited capital more of these implements could be used and with their aid more labor be employed.

Thus, instead of supplying a relatively small number of tractors and combines to agriculture, it would be more economical to supply a host of spades capable of employing a lot of labor at a relatively low level of productivity. It also follows that those industries must be chosen for development which require relatively little capital compared with labor, i.e., a low capital labor ratio.

Thus in the first stage of traditional development, at least, handicrafts, or cottage industries, are preferable to factory industry equipped with modern machinery, and light industries to heavy industry, especially as the former are quicker yielding, in the sense of augmenting sooner the supply of consumer goods available either for home consumption or for export.

The theoretical reasoning of traditional development thus depends essentially on taking a Ricardian static point of view, for launching the economy to "takeoff" through massive use of abundant labor, in a process of generic complementarity of industry and agriculture. However, the course of action which makes employment and output as large as possible here and now, in the conditions of the moment, is not necessarily the course of action that will maximize the growth potential of the economy, quite the contrary.

A policy of maximizing the latter, even if it is at the expense of making immediate output and employment smaller than they would be under an alternative policy, as Dobb (1963: 45-59) specifically points out, and as the crux of his argument is elaborated on above, could enable both output and employment, and hence consumption, to grow more quickly, and before long be larger than they would otherwise have been at such an early date. Dobb's well-taken insight is that a smaller share of a total that is growing fast can very soon become larger than a bigger share of a total that is growing more slowly.

This of course depends on determinants of the growth potential of an economy, not necessarily the financial limits in the amount that can be invested, but the real production limits --real resources available and production possibilities of the requisite kind. These limits may be of various kinds. Yet in a particular situation there is likely to be one (or a few) that is more important than the rest, because it is in these circumstances more restricting.

If the resources available can be directed towards widening this bottleneck, they will be contributing much more to promote growth than if they are used in the generic complementarity of the traditional perspective. It is in this sense that Dobb posits that achievement in promoting growth may depend more on the way one uses the investible surplus than on its initial size.

A bottleneck of constructional and building materials, in particular iron and steel, fuel and power, for example, is problematic. Obviously, new factories, steel mills, power plants and industrial towns cannot be built faster than cement, steel and bricks become available for their construction, and fuel and power are available to drive the new machinery when it is installed. These operate as effective limits upon the rate at which a country can develop out of its own resources. Whatever investment potential a country has should thus be concentrated upon methods and lines of production which will increase this investment potential still further.

Insofar as the limiting factor consists in the output capacity of the industries which produce capital goods (machines and constructional materials), the possible growth rate in the future will be higher the larger the proportion of current investment that is directed towards expanding this basic/heavy sector of industry: A country will have a larger output of steel and machines in future years with which to construct and equip new factories and power plants and steel mills. To this extent machine tools to make more machine tools will be more growth inducing in the critical start of the transformation than automatic looms or shoe-toe-lasers, not to mention soft drinks or chewing gums. The latter can always come later, once the economy is on a reasonably well-established growth path.

Insofar as the need is greater for foodstuffs and other consumer goods, it will not be the best policy from a growth standpoint to invest in very low productivity, labor intensive techniques (i.e., the Muhammad Yunis’ Bangladeshi recipe currently promoted in the US media and academia), even if at the moment these would be capable of affording a lager volume of employment. On the contrary, techniques should be chosen which, even if more costly, are more productive, and which by achieving a higher level of productivity per worker will make the surplus product larger; thereby enabling a larger labor force to be employed in other sectors of the economy: Surplus products will lead to accumulation and later to reproduction.

Labor intensive techniques, as a way of reducing unemployment and underemployment, cannot be a proper strategy for the UDCs because of their low productivity. The key is how high the rate of growth is, how large the surplus is, and then how the latter is handled to stir growth and employment while stabilizing the country and its population.

The way a given rate of investment is used will inevitably influence the size of this total investment in the future. A certain investment ratio and its most desirable allocation are intrinsically connected. A high growth rate policy will involve a conflict between the requirements of growth and a quick expansion of employment and consumption. In the earlier stages one will be under pressure because of high unemployment. But in the medium-range the conflict will peter out, since the high growth rate policy will soon make possible a more rapid expansion not only of investment but of employment and consumption as well. This will be done by causing a larger proportion of the employed labor force to be used in construction and other growth inducing activities. Powerful, self-expansionary forces in growth will be achieved as soon as the growth rate has been raised above a low level.

There are fairly obvious reasons, moreover, why an unfettered free market economy is most unlikely to maintain a high growth rate policy of this kind, whereas a planned one can achieve it: Individual businesspersons in their investment policy are ambivalent about looking very far ahead; and this not because of any innate shortsightedness but because of the situation in which each decision maker is set in an unplanned, free for all, individualist system. One cannot look far ahead because the horizon is limited both in time and space by the (Shackle-Keynes type) uncertainties involved.

In the first place, an entrepreneur can only afford, from a profit making standpoint, to take account of the consequences of her action which accrue to her own firm. Such effects as it may have for other firms and other industries and for society as a whole are none of one's business, except so far as she thinks, perhaps, that they may affect the price, or sales, policy of immediate rivals. One will be uncertain as to what other firms and industries are planning to do by way of expansion; at best one can make rather vague guesses, and the vaguer these are the more one will play for certainty and wait and see.

Yet metamorphosis essentially consists of a complex of interdependent actions, each influencing and being influenced by the rest. If an individual capitalist invests in expansion, it will be, if she is wise, for an immediately foreseeable market, and on the basis of productive possibilities (in the way of supplies of raw material, components, equipment and transport facilities) that are already visible. Hence market demand depends largely on investment decisions taken in other parts of the economy.

Furthermore, the development pattern for Western capitalism has been the way of textiles first. The last thing that an unfettered private enterprise, free market economy is likely to do is to invest in the development of additional productive capacity for making machine tools in advance of any immediate or easily foreseeable demand for them from other industries. To do so would be an act of faith that gambled on the maintenance of a particular rate of investment in the economy at large for decades. When this kind of development has occurred in the past it has either been under the stimulus of war demand or rearmament or a burst of railway building, or else in the heady optimism of boom years which has very soon collapsed into a slump.

It is true that at certain stages of their development the more industrial capitalist countries have expanded their capital goods industries more rapidly than industries making consumers' goods (Dobb, 1963: 45-59). However, this was at a relatively late stage, after the consumers’ goods industries, with their demand for machines for replacement and expansion, had shot ahead and an export market for capital goods had developed from the industrializing needs of other countries still at a lower level of growth.

The traditional mechanism then provides useful insights into the process of economic growth for the DCs, but is incompatible with an all out objective of socioeconomic transformation for extant conditions of underdevelopment.

1.5 The Bretton Woods Mechanism

The 1944 Bretton Woods conference was supposedly an attempt to institutionalize at an international level the economic vision of Keynes. Observing the realities of the capitalist system in the 1920s and 1930s, Keynes --as pointed out above-- had concluded and argued that the prosperity of nations --in particular, their levels of production and employment-- did not need to be the unplanned outcome of an uncoordinated and erratic construct, but could be controlled by government. At a national level, this in theory did not require new institutions but rather new approaches to existing ones: Adjustments had to be made in government spending and taxation and in central banks' money creation and interest rate determination. But no devices existed at the international level to perform these functions; there were no international counterparts to central banks or national budgets.

In 1941, then, Keynes developed the idea of an International Clearing Union --a sort of world level central bank. His plan provided the main basis for the Bretton Woods discussions. The forty-four nations represented there had set out to create international organizations throughout the world that would prevent the recurrence of a 1930s’ style depression with its massive unemployment, escalating tariffs and collapsing commodity prices.

After considerable negotiation, the International Monetary Fund (IMF) and the World Bank were established in 1944.[175] Although in structure and functioning the IMF differs quite radically from Keynes' own plan, its fundamental objective was decidedly Keynesian. According to the first of its Articles of Agreement one of the IMF's basic purposes was "to facilitate the expansion of balanced growth in international trade to contribute thereby to the promotion and maintenance of high levels of employment and real income [,] and to the development of the productive resources of all members as primary objectives of economic policy." The IMF was thus jointly established by member nations pronouncedly to promote international monetary stability and to facilitate the expansion and balanced growth of world trade.

Article One of the Fund's charter also called on the IMF to make financial resources available to members on a temporary basis, and with adequate safeguards to permit them to correct payments imbalances. The Bretton Woods Agreement thus charged the IMF with prime responsibility for short-term macroeconomic developments --specifically, with maintaining stable exchange rates, except in situations of fundamental disequilibrium, and with providing finance to assist countries whose balance of payments were in short-term disequilibrium (Stewart, in King, 1990: 330-1).

The Bank was oriented more toward development. As indicated by its official name, the Bank for International Reconstruction and Development (IBRD), it initially had two main functions. The first was temporary: To help finance the reconstruction of the war devastated economies of Europe. The second primary duty, as described by Keynes, was "to develop the resources and productive capacity of the world with special attention to the underdeveloped countries, to raise the standard of life and the conditions of labor everywhere, and so to promote and maintain equilibrium in the international balance of payments of all member countries" (The Collected Writings of John Maynard Keynes, Vol. XXVI: Activities Shaping the Post War World: 1941-1946, 1980).

In 1952 the principle of “conditionality” was implicitly incorporated into the Fund's lending policies. Conditionality was conceived to encourage policies that would make it more likely for a member country to be able to cope with its balance of payments problem and to repay the fund within three to five years (Sidell, 1988: 240). The inception of the practice of conditionality accompanied the birth of the "stand by arrangement." The latter, in its infancy, was intended to be a precautionary device used to ensure access on the part of members who had no immediate need for such resources in the near future. This arrangement, however, matured quickly into a device for linking economic, and later political, policies to financial assistance. Technically, the stand by arrangement can be described as a line of credit outlining the circumstances under which a member can make drawings on the Fund. However, the question of what type of conditions the IMF should attach to loans is of course an essentially political question.[176]

On 20 September 1968 the Fund decided to incorporate the practice of conditionality explicitly into its charter. Prior to this date, the concept of conditionality had generally been referred to in a vague manner. The amendments to the Fund's Articles of Agreement in 1968 ended this vagueness by introducing for the first time clear language which outlined the Fund's position with respect to conditionality (Sidell, 1988: 242).

Until the mid-1970s the typical conditions placed on the use of Fund resources involved policies that influenced the level and composition of aggregate demand. During this period, excess demand was perceived as the most important cause of inflation, currency overvaluation and ultimately payment difficulties. The expeditious elimination of excess demand was viewed as an essential condition for restoring payment equilibrium. This position is the product of the monetarist conception, whereby excess demand is deemed the root cause of inflation and exchange rate disequilibrium. Its goal is the rapid alleviation, typically in one year or less, of inflation and the restoration of exchange rate equilibrium vis-à-vis policies that alter the size and composition of aggregate demand.

Monetarist policies thus generally call for:

(1) Control of the money supply.

(2) Reduction of the government deficit.

(3) Exchange rate devaluation.

(4) Deregulation of prices.

(5) Reduction of consumer subsidies.[177]

(6) Elimination of tariff and nontariff trade barriers.

More than any other factor, it is the IMF's neoclassical construct about economics and economic causality that most influences the specific content of Fund programs. This construct, shared also by the World Bank, is thus generally monetarist. For a long period, the Fund explicitly adopted this monetary approach to balance of payments problems and also to inflation (somewhat inconsistently, since one instrument cannot normally be used to achieve those two objectives). The Fund's approach is also laissez faire, with emphasis on price rather than controls, the private rather than the public sector and free trade rather than protectionism. Further, because of its strong and pervasive construct the IMF is not only concerned with policy objectives but also takes a firm view about which policy instruments are preferable. Thus even though the declarations of the Bretton Woods framers were Keynesian, the institutes[178] they created have turned out to be anti-Keynesian (Stewart, in King, 1990: 332).

In the mid-1970s the monetarist strategy gave way to a more “structural,”[179] longer run approach. The introduction of this new approach to payment adjustment was precipitated by the growing recognition both within and outside the Fund that payment imbalances could no longer be expected to be corrected within one year as the anticipations had been. In response to this recognition the Fund increased its support for programs that called for adjustment over a longer period.

In 1974, the Fund established the "Extended Fund Facility" which was designed to provide members with up to three years of financial support. In addition, the Fund decided in 1979 to allow the stand by arrangements to be extended for up to three years. This development was accompanied by growing support for more comprehensive programs designed to affect the balance of payments through changes in supply as well as in demand.

In practice the implementation of a Fund stand by arrangement is very likely to be preceded by a number of disruptive economic problems including inflation, overvalued currencies, current and capital account imbalances and economic stagnation. Although one can argue about the fundamental causes of these economic problems one cannot dismiss the fact that these problems are probably present at the time of Fund supported intervention (Sidell, 1988: 244).

These programs continued to rely on the typical monetarist instruments but in a more gradual manner. In addition, they called for more structural, supply oriented policies such as reducing the size of the public sector, channeling resources away from the public sector and into the private sector, creating financial intermediaries, promoting savings and discouraging wasteful investment by increasing real interest rates.

To facilitate the success of these enlarged programs the Fund increased by six times the amount of resources that member countries were allowed to borrow. The Enlarged Access Policy of 1981 authorized members to cumulate a maximum of up to 600 percent of their annual quota to the Fund.

Ostensibly the Fund and the Bank exhibit many common characteristics. Both are owned and rhetorically directed by the governments of their member nations. Both organizations supposedly concern themselves with economic issues and concentrate their efforts on broadening and strengthening the economies of their members. Despite these similarities, the Bank and the Fund remain distinct. The Bank is primarily a development organization; the Fund seeks to maintain an orderly system of receipts and payments between nations. Each has a different purpose and a distinct structure, receives its funding from different sources, assists different categories of members and strives to achieve distinct goals through methods peculiar to itself.

At Bretton Woods the international community assigned to the International Bank for Reconstruction and Development (IBRD) the primary responsibility for financing economic development. The Bank's first loans were extended during the late 1940s to finance the reconstruction of the war ravaged economies of Western Europe. When these nations recovered the Bank turned its attention to the underdeveloped countries.

The Fund was assigned a different purpose. The Fund was a reaction to the unresolved financial problems instrumental in initiating and protracting the Great Depression of the 1930s: Sudden, unpredictable variations in the exchange values of national currencies and a widespread disinclination among governments to allow their national currency to be exchanged for foreign currency.

The Fund's Articles of Agreement constitute its code of conduct. It requires members to allow their currency to be exchanged for foreign currencies freely and without restriction, to keep the Fund informed of changes they contemplate in financial and monetary policies that will affect fellow members' economies and, to the extent possible, to modify these policies on the advice of the Fund to accommodate the needs of the entire membership.

To help nations abide by the code of conduct the Fund administers a pool of money from which members can borrow when they are in financial trouble. The fund is not, however, primarily a lending organization as is the Bank. It is first and foremost an overseer of its members' monetary and exchange rate policies and a guardian of code of conduct.

The World Bank is an investment bank intermediating between investors and recipients, borrowing from the one and lending to the other. Its owners are the governments of its member nations with equity shares in it. The IBRD obtains most of the funds it lends to finance development by market borrowing through the issuing of bonds (which carry an AAA rating because repayment is guaranteed by member governments) to individuals and private organizations. Its concessional loan associate, IDA, is largely financed by grants from donor nations.

The Bank is also a major borrower in the world's capital markets and the largest nonresident borrower in virtually all countries where its issues are sold. It borrows money by selling bonds and notes directly to governments, their agencies and central banks. The proceeds of these bond sales are lent in turn to countries in need.

The Fund is not a bank and does not intermediate between investors and recipients. Nevertheless it has at its disposal significant resources. These resources come from quota subscriptions or membership fees paid in by the Fund's member countries. Each member contributes to this pool of resources a certain amount of money proportionate to its economic size and strength.

While the Bank borrows and lends the Fund is more like a credit union whose members have access to a common pool of resources, the sum total of their individual contributions. Although under special and highly restrictive circumstances (such as the recent bailout of the Mexican and East Asian economies) the Fund borrows from official entities, but not from private markets, it relies principally on its quota subscriptions to finance its operations. The adequacy of these resources is reviewed every five years.[180]

The Fund thus supposedly:

(1) Oversees the international monetary system.

(2) Promotes exchange stability and orderly exchange relations among its member countries.

(3) Assists all member countries, both industrial and underdeveloped, that find themselves in temporary balance of payments difficulties by providing short to medium-term credits;

(4) supplements the currency reserves of its members through the allocation of special drawing rights (SDRs).

(5) Draws its financial resources principally from the quota subscriptions of its member countries.

(6) Has at its disposal fully paid in quotas.

Thus, at the outset of Bretton Woods, the IMF unfolded with a principle which remains essentially the same: Creditworthiness at the donor level and easy credit terms at the recipient end. A fourfold increase in the number of IMF member nations has occurred --membership reached 151 nations in 1987, and two dozen states were added thereafter. But size has not changed structure. It was practice that changed (or uncovered) the de facto from the de jure IMF.

The Bank on the other hand presumably:

(1) Seeks to promote the economic development of the world's poorer countries.

(2) Assists underdeveloped countries through long-term financing of development projects and programs.

(3) Provides to the poorest underdeveloped countries special financial assistance through the International Development Association (IDA).

(4) Encourages private enterprises in underdeveloped countries through its affiliate, the International Finance Corporation (IFC).

(5) Acquires most of its financial resources by borrowing on the international bond market.

(6) Has an authorized capital, of which members pay in.

During the half century that has elapsed since the Bretton Woods Conference there have been many changes in the international economy. New centers of economic power, notably Japan and Germany, have developed, and the positions of old centers, such as Britain, have sharply eroded. International capital markets have grown enormously and have changed in nature. Of major significance, both politically and economically, has been the displacement of colonialism, to be replaced by neoimperialism, and the subsequent emergence of some hundred and forty independent underdeveloped states. Such shifts have contributed to changes in the Bretton Woods organizations.

The World Bank has become a source of finance and advice for projects, sectoral development and development policy. However, it contributes little to the making of world macroeconomic policy. This has been the responsibility of the IMF. At regular intervals the Fund makes assessments of the world economy. Although it has made some moves toward generalized interventions, it has for the most part --especially in recent years-- focused most closely and vigorously on influencing the policies and finances of deficit countries seeking access to its resources. Accordingly, any attempt to analyze the IMF's effects on underdeveloped countries and on the world economy as a whole must concentrate on IMF country programs (Stewart, in King, 1990: 331).

The IMF's influence on the policies of individual countries has grown over the decades. As pointed out above, the 1950s saw the development of the practice of "conditionality," which made access to IMF finance conditional on a country's adoption of certain macroeconomic policies. Initially, conditionality requirements were imposed only on a minority of countries receiving loans, about one out of four in the 1970s, for example. However, by the 1980s conditionality had become more pervasive and was applied to over three quarters of IMF loans. At the same time, as more countries have experienced economic difficulties, more have turned to the Fund for finance. In the 1970s, an average of ten countries initiated programs each year. In the 1980s, this number never fell below twenty, and throughout the first half of the decade over forty countries had IMF programs in effect for at least one month each year (Stewart, in King, 1990: 335-7).

As a result of its position as a lender of last resort and as the chief evaluator of a country's economic policies, nonetheless, the IMF has been heavily criticized, particularly in the UDCs. In order to meet IMF approval a country is required to follow very restrictive macroeconomic policies, e.g., reducing budget deficits dramatically, cutting the money supply, etc., which lead to high unemployment and to a restriction of social programs. Much of the burden of these policies falls on the poor. In response to IMF policies, therefore, it is not uncommon to see rioting in urban centers of the UDCs. IMF policies, moreover, can only be enforced by coercive, authoritarian governments and thus the IMF thwarts attempts at democracy in the underdeveloped countries.

Originally, however, it was not the UDCs but the Untied Kingdom that took a dim view of tight IMF money policies. England's main representative to the Bretton Woods Conference, John Maynard Keynes, argued a position that has now become familiar throughout the UDCs: He advocated the creation of a new international liquidity and a reserve instrument linked only nominally to the gold standard. He urged the granting of substantial automatic credit lines, now called Special Drawing Rights (SDRs). Keynes also argued the case that the United Kingdom should have a large degree of autonomy in its domestic economic policy, and that it should emphasize deflationary policies to safeguard an external equilibrium under a system of fixed exchange rates that no longer seemed acceptable. What emerged was a fluid exchange rate (Horowitz, in Myers, 1987).

Evidently the current policies of the IMF are in sharp contrast to the ideas that Keynes declared when he first proposed the IMF. The IMF has been taken over by the monetarists, whereby the contractionary policies that they recommend have not encouraged the type of self-sustaining growth necessary for economic development. The IMF should thus follow a more explicitly Keynesian, expansionary approach in its recommendations to underdeveloped countries (Frances Stewart, "Back to Keynesianism: Reforming the IMF," in King, 1990).

Moreover, the Fund itself generally provides only a small proportion of most countries' financial needs. Yet its influence extends well beyond its strictly financial significance, since other organizations have come to demand that countries have IMF agreements before they will agree to supply additional finance. The private banking sector rather universally makes such a requirement before rescheduling loans, as does the Paris Club, which deals with official loans from bilateral borrowers.

This type of "cross conditionality," whereby conditions imposed by one organization (the IMF) serve as requirements for other organizations as well, has also extended to the Structural Adjustment Loans (SALs) of the World Bank. Consequently, for countries in financial difficulty, obtaining finance from nearly any source --the private banking sector, bilateral donors, the World Bank-- has become contingent on the country's agreeing to IMF conditionality. The IMF governs the UDCs.

Indeed, the first half of the 1980s could be described as years of IMF conditionality in Africa and Latin America. Two thirds of the countries in those continents undertook IMF programs; the overall shift in economic climate caused many others to adopt policies similar to IMF programs in order to satisfy their creditors. Thus, in effect, the IMF became the major policy maker in most African and Latin American countries. These years therefore provide an opportunity to assess the impact of the Fund's advice on individual countries.

Further, because of the Fund's central role in the world financial system, and because its advice has been taken by so many countries, its impact has extended well beyond developments in individual countries to the world economy as a whole. There is, however, a paradox in the events of the first half of the 1980s. These were years when Keynesian policies were most needed, and when the IMF had more influence than at any time before that. Yet they were also years when the world economy, and particularly underdeveloped countries, veered away from the path declared by the IMF's Keynesian foundations --that of high income and employment and development of productive resources.

While the Fund's influence has grown over the decades, the condition of the world economy has declined. Unemployment in developed nations has risen in every decade since the 1940s. Output growth has slowed. The 1980s and 1990s have proved the worst decades for many countries, especially the poorer ones, since the last Great Depression. The terms-of-trade of primary producers have been worsening and commodity prices have fallen lower than they have been for sixty years. Making matters worse, voluntary private lending to underdeveloped countries through the banking system, which became a dominant source of finance in the 1970s, has more or less stopped (Stewart, in King, 1990: 334).

This widespread economic deterioration has caused acute problems for many underdeveloped countries. The stagnancy of world markets, the growth of protectionism and the fall in commodity prices have made it increasingly difficult for them to earn their way out of their economic troubles. Their export earnings are constantly declining. At the same time, trade deficits have become less and less easy to finance. The Bank lending that flowed freely in the 1970s has dried up since the 1980s, yet debt service obligations have continued to mount, pushed upward by high interest rates. Some countries have had to set aside more than half of their export earning for debt servicing, which leaves a small portion of a declining total available to pay for imports. From this situation emerged an acute foreign exchange crisis, which further obliged more and more underdeveloped countries to turn to the IMF (Stewart, in King, 1990).

At present, the Fund’s programs applied to different countries have a great many characteristics in common. First, they are usually negotiated in secret on a bilateral basis --in other words, independent parties, other countries and international organizations besides the IMF are not involved. Instead, the details of the conditionality agreement are typically worked out between the IMF representatives and officials from the country's finance ministry and central bank. It is partly because of these individuals' orientation that IMF programs rely heavily on macroeconomic policy instruments and tend to neglect the social and political aspects of a country's situation. Fund programs are usually introduced when a country's economy is in severe imbalance --externally, with large current account deficits in the balance of payments, and internally, with high rates of inflation and deficits in the domestic budget.

In order to offset these imbalances, IMF programs use three types of policy. One is to restrain demand, through cuts in government spending, limits on credit creation, increases in taxation and restraints on wages and public sector employment. Another is to encourage the channeling of resources into tradable goods through devaluations in the country's currency and through price reforms. The third is to implement such measures as financial reform and import liberalization intended to raise the medium and long-term efficiency of the economy.

In actuality, the second and third types of policy, which are supply oriented, tend to receive less emphasis than the first. This heavy reliance on demand restraint is due partly to the short time horizon of most programs --typically twelve to eighteen months. Such a period may be enough to make short-term improvements in the balance of trade by curtailing incomes, expenditure and demand and thereby rather immediately reducing imports. Measures to expand supply on the other hand nearly always take much longer.[181]

Second, there is a general assumption that excessive expenditure by the state, particularly where this takes the form of encouraging higher levels of consumption rather than production, should be reduced. Thus the Fund will attempt to cut levels of government borrowing and this by implication will mean a corresponding cut in the services provided by the state. It will mean a reduction in welfare services for the poor. Subsidies to public sector industries will also be subject to pressure and it is not unusual for the IMF to recommend that such industries be sold off to private enterprise. Furthermore, there is likely to be pressure to reduce state subsidies on the price of either consumer goods or inputs for uncompetitive industries.

Third, associated with this attack on state spending will be an attempt either to reduce wages or to limit their growth to less than the growth in productivity in industry. Rising wages are believed to make it difficult for local producers to compete effectively abroad and therefore to export[182] successfully. Rising wages are also said to generate an increase in consumption which can only be met through imports since local production cannot usually expand rapidly enough to meet the increased demand.

Fourth, while it is assumed that these cuts in wages and services will reduce imports it is also assumed that they will lead to an increase in the profits of the private sector since private capitalists will subsequently have to pay lower taxes and reduced labor costs. This will make it possible for both domestic and foreign capital to increase their investment in productive capacity and thereby either reduce the need for imports or increase the overall level of production in the long-run. In this respect an increase in the activities of foreign capital is thought to be especially useful because the capital which they import, as well as the goods which they produce, serve to reduce the level of the balance of payments deficit.

Last, the IMF will tend to discourage the use of direct controls over trade to reduce the deficit. It is very likely to demand a devaluation of the currency and will also try to do away with all attempts to use the rate of exchange to favor local as opposed to foreign producers. Although the Fund may not insist on the full elimination of tariffs it will resist any attempt to increase them and will indeed attempt to have them reduced. Thus, in theory, it will be forcing the country concerned to secure the improvement in its trade by increasing the competitiveness of its goods rather than by using direct controls to favor local over foreign producers.

Disequilibria in the UDCs, however, may be planned or accidental. The former occur when the chosen development strategy involves unbalanced growth paths; for example when planned imports of intermediate commodities and investment goods necessary for industrialization lead to a current account deficit in the initial stages of development. On the other hand accidental disequilibria can be provoked by unforeseen disturbances such as domestic political turmoil, changes in the world demand for the country's exports, in its terms-of-trade or in interest rates.

In the context of the latter set of disturbances, with a focus on the role of the exchange rate and tariffs when a negative shock in the terms-of-trade occurs, Enrico Colombatto adopts a short-run, macroeconomic perspective whereby intertemporal effects are overlooked. Using data drawn from the IMF's International Financial Statistics Yearbook, 1990, with reference to all UDCs considered in the terms-of-trade statistics, Colombatto looks at the annual terms-of-trade variation in thirty-eight UDCs during the 1960-89 period. He finds out that for the average UDC, in more than one third of the years there has been a fall in the terms-of-trade of at least four percent; and that for nine of these UDCs such fall has occurred in more than 45 percent of the years considered.

As for policies, in most cases a laissez faire attitude after a terms-of-trade shock is hard to enforce, for it would require the absence of significant externalities and low adjustment costs; among other things, all prices should be reasonably flexible and factors should be mobile, both geographically and across industries. Such conditions are hard to meet in the UDCs. Moreover, since such a policy would imply a new distribution of income among industries, and thus among factors, difficulties would arise also from a political point of view. Furthermore, fiscal and monetary responses to a terms-of-trade deterioration are not always feasible, either. On the fiscal side, tighter policies are hard to enforce. Public expenditure is usually difficult to cut, especially when the country experiences a fall in GDP --which is certainly the case if measured at international prices, likely at domestic ones.

Similar phenomena apply to ordinary revenues as opposed to trade tariff revenues; for unless the ordinary average tax rate is increased substantially after the shock the fall in GDP necessarily implies a fall in revenue. On the other hand, the scope of monetary policy tends to be very limited in many UDCs: Monetary policy in underdeveloped conditions largely follows fiscal policy. In many countries the absence of well-developed capital markets limits the instruments of monetary policy to credit controls, interest rate ceilings and changes in reserve requirements. Money creation is in many cases the residual source of financing.

In short, although adjustment is crucial for growth, in many UDCs fiscal and monetary tools are seldom available especially after a negative shock has occurred. On these grounds Colombatto’s analysis of the feasible trade policy options --exchange rate and import tariffs-- is justified (Colombatto, 1993).

Colombatto's framework within which to study a specific adjustment policy for a typical UDC after a fall in the terms-of-trade demonstrates that although the immediate consequences of such a shock tend to be similar in the various types of UDCs examined, the appropriate policies may differ according to the nature of the economy, as regards both its domestic features and its initial trade attitude.

As a consequence, whereas in some cases Colombatto's model tends to provide rather standard answers (calling for more free trade and less government intervention), there are cases where the best response to a shock might be protectionism, and where the best way to make subsequent adjustment easy is to keep the degree of commercial openness low.

Contrary to common belief, then, Colombatto's model suggests that opening up to trade is not the best policy under all circumstances after a shock. As a matter of fact if the UDC is not managed according to --by and large-- the rules of the market, a rational response to a terms-of-trade shock may well be protectionism and exchange rate revaluation; a policy that seems to be easier to carry through if trade volumes are relatively low.

Industrial countries, however, are competitive in their home market so that few foreign producers can increase their sales by exporting to them. Their ability to compete more effectively than everyone else leads to deflation in those countries which cannot find expanding markets elsewhere. This growth in the strong countries does expand the market for raw materials, but it inhibits the growth of manufacturing in weaker countries that is essential for the creation of a balanced growth process (Brett, in Latin America Bureau, 1983: 34-5).

Moreover, the intensification of the world economic crisis after 1974 coupled with concurrent oil price rises left the UDCs facing massive deficits that could be controlled only through drastic cuts in living standards and in the level of economic activity. IMF programs designed to reduce balance of payments deficits in the short-term, furthermore, result in substantial cost in terms of reduced consumption, damage to local industry and increased inequality.

Given the need to solve the problem quickly, and for other underlying reasons, most of the improvements have to be secured through a reduction in domestic consumption rather than an increase in production for export or in import substitution. The overall effect is therefore likely to be deflationary involving a decline in the overall level of economic activity, and a corresponding reduction in both local consumption and in long-term economic progress.

In trying to increase their exports, the UDCs immediately confront the strong developed countries which are attempting to do exactly the same. However, the latter have the advantage of producing on a very large scale, selling to a huge home market (a large middle class) as well as having established markets abroad, having direct use of highly trained work-force and sophisticated research and development facilities, and having a monopoly over many areas of technology and skills.

Given all of these factors the possibility of competing with them on equal terms is rather negligible. Alexander Hamilton, unconfused by neoclassical scientism, did intuitively recognize this fact very clearly, as is mentioned above. And the politicking with “comparative advantage,” by David Ricardo and his latter-day disciples, could not alter this fact.

The only "advantage" that most UDCs have over these established producers is the very low wages that their workers can be paid. Even this, however, is of relatively limited value. On the one hand the existence of low wages means that local markets are very small, thereby making it difficult to produce on a sufficiently large scale to reap the full advantage of modern production methods. On the other, low paid workers tend to be poorly trained and motivated, so their productivity is correspondingly low.

Furthermore, the industrial countries have been able to continuously adopt new technology, the automation secured through the micro-chip is an example, which has enabled them to pay much higher wages to their workers and still produce goods more cheaply than the average UDC producer.

In sectors such as cotton textiles where cheap labor does provide low wage countries with international competitive edge, the industrial countries have tended to ignore their professed belief in free trade and have adopted protective controls in order to defend jobs and capital investment in that sector.

Thus by reducing tariff protection in their home markets and attempting to grow by exporting manufactures UDCs render themselves very vulnerable. Several countries have found that established industries in their own countries have been destroyed as a result of tariff barriers having been lowered (Brett, in Latin America Bureau, 1983: 37-8).

Meanwhile, whereas the reduction of state spending might enable producers to pay lower taxes it will also reduce domestic demand for their products. Thus producers will lose some of their home market, usually the most profitable for them, and this loss of demand may mean a reduction in total production. Such a reduction will inevitably mean that the costs of producing each unit of output will rise as fixed costs will have to be offset by a smaller total production. This will lead to increased selling prices and therefore the firm will be less competitive internationally.

Nor will the lower taxes necessarily encourage producers to invest their increased wealth in local industry. When demand is being reduced through the reduction in wages and government spending they are more likely to spend it on consumer goods, which are very likely to be imported, or else to invest it abroad.

The latter is most likely to happen where a significant portion of local production is already in the hands of foreign capitalists who find it easy to remove their profits from UDCs either directly through legal channels or indirectly by various forms of transfer pricing (Brett, in Latin America Bureau, 1983: 38-9). Thus unless the reductions in wages and other costs are very large and the opportunity for increasing export markets very favorable, deflationary policies are quite likely to lead to a cut in society's consumption and productivity without leading to a subsequent improvement.

The effects of these policies on the overall world economy are likely to be very harmful. The UDCs are trying to overcome their deficits by cutting imports and increasing exports. But since most of their potential customers are attempting to do the same, the result can be intensified competition in which only the most powerful might succeed but at the expense of the weaker nations.

Even if the global trade outlook improves, it is illogical that all underdeveloped countries can expand exports all at once, for in the long-run exports and imports are a zero sum interaction. A country’s exports are another’s imports and vice versa. Exports and imports are two sides of the same coin.

It is therefore impossible for all countries to increase exports and reduce imports at the same time: How can all countries simultaneously export more than they import? Who will import the excess? This simple logic is not even admitted by the neoclassical export led growth model, much less the problem conceded. The neoclassical export led growth, therefore, has this obscurantist quality built into its conception.

An often-uttered rationale for the export led growth motto is that an outward looking economy does not mean trade surplus, thence every country can adopt export oriented growth: A rationale that siphons off the meaning of export led growth. It combines the unattainable neomercantilist best of both worlds: Production for export (mercantilism) and surplusness (free trade). It is a "vent for no surplus" rationale.[183]

Andre´ Gunder Frank (1967: 118; 1978: 79) affirms the logical nongeneralizability of the Newly Industrialized Countries' (NICs') export led growth model: Who would import? If all countries are to increase their exports simultaneously, they will have to also increase their imports correspondingly (for in the aggregate current account surpluses and deficits must sum to zero), in which case the policy could as well be described as import led.

Furthermore, surplus countries, i.e., most industrial and oil producing ones, lend their surpluses to the international banks which invest them through lending to deficit countries. This process has the general long-term effect of increasing levels of indebtedness of the deficit countries, and means they will have higher interest and capital repayment commitments and will therefore have less resources available to develop their own industrial base. Thus their ability to generate exportable production and improve their balance of payments will be hindered. Hence, a short-term solution is being adopted that must worsen the problem in the long-run.

The IMF recommendations thus are the problem for which they purport to be the solution. They correspond to the policies favored by large scale international capital and its supporters in underdeveloped countries. It is the strong transnational corporations[184] that have most to gain from policies which favor the free movement of goods and money, since they are able to move their investments to whichever country offers them the greatest concessions and, therefore, profit potential.

Many of the individuals involved in local political activities depend for their own political and economic privileges on their links with these corporations and with the governments of the major world powers that lie behind them. Many such transnational corporations use their economic power and political leverage to force countries to seek IMF assistance and submit to its conditionality. Moreover, the powerful industrial members of the IMF have used access to the Fund's resources as an instrument of their own foreign policy objectives.[185]

The Bank too has become like the IMF --pushing simplistic, standardized formulae that slight the particular spatio-temporal circumstances, history, culture and politics of individual nations, and that are based more on preconceived construct than on objective analysis. Of course trade liberalization may be appropriate at times but one has to remember that the relatively closed economies of India and especially China have been doing very well of late, that the debt crisis shackles many economies to trade surplus maximizing strategies, and that successful export promotion policies may involve significant state activism, as the Asian industrialization processes demonstrate.

The financial liberalization process in Latin America is also informative in this regard. Theoretically, the main economic causes of capital flight are an overvalued exchange rate; positive differentials in interest rates on foreign and domestic assets; an increase in the domestic rate of inflation, which tends to be accompanied by a fall in the real rate of interest; and inflows of foreign aid, which result in an appreciation of the exchange rate and a fall in the real rate of interest. It is for these reasons that foreign aid and commercial borrowing often are associated with increased capital flight (Keith Griffin, Studies in Globalization and Economic Transitions, 1996: 52). The financial liberalization in Latin America has been undertaken under conditions that stimulate either massive capital flight from the economy, intended to avoid local inflationary taxes or domestic inflation risk, or otherwise huge capital inflows, attracted by exceptionally high real interest rates. The result under these conditions has been financial disaster. Hence, the experience of Latin American nations suggests that opening the economy to internationally mobile, short-term financial flows when such is not supported by a stable economy can generate substantial instability.

Nor has Asian financial liberalization been free of complications. The Korean liberalization of 1964 was plagued by problems similar to, although of a lower magnitude than, those encountered in the Latin American experiments. Korea's short-term financial inflows flooded the economy in 1966 leading to financial destabilization and inflation (Rivera-Batizs, 1994). Both experiences, together with the current instability in the East Asian financial markets, show the delicate nature of the UDCs' path toward deregulation and openness.

It is not surprising, then, that the original Keynesian finance objectives have not been achieved. The record of the 1980s shows just how far short of achieving those objectives IMF programs have fallen. The Bank was making its presence known, fervently pushing free market solutions "to all the world's ills." In 1980, the Bank made its first structural adjustment loan. Although the Bank later acknowledged that it had failed to assess their possible negative social impact, these loans grew to a quarter of the Bank's portfolio by mid-decade and have remained near that level ever since.

In practice, the policies associated with these “structural adjustment” programs --the promotion of exports, trade liberalization, privatization, deregulation, wage restraints and budget and credit cuts-- led to the deepening and spreading of poverty worldwide. Many countries with Fund programs experienced severe economic difficulties while on those programs (Rich 1994: 68).

Current levels of output and income have fallen and the combination of stagnant real investment, rising malnutrition and falling health and educational standards (as is elaborated upon below) has adversely affected physical and human capital. As a result the prospects for medium and long-term economic growth are being undermined.

Thus, after undergoing tough IMF programs many countries have found themselves with reduced real incomes, increased poverty, deteriorating social conditions, reduced growth potential and often no significant improvement in their external account balance. In this last respect the IMF programs failed even to meet their most narrowly defined goal --to improve the imbalance of the external account.

The inadequacy of Fund programs at a world level becomes clearer if one examines the impact they have had not only on individual countries but on the world economy as a whole. In general the IMF's approach to correcting payments imbalances has created a worldwide tendency toward deflation. Adjustment programs require deficit countries to attempt to eliminate their deficits by cutting expenditure and employment so that their imports fall.

Such a strategy might under the right conditions help reduce deficits in underdeveloped countries' current account balances. But when applied to many of these countries simultaneously it also causes a significant drop in UDCs' demand for both UDCs' and DCs' products (Stewart, in King, 1990: 333-7). Thus IMF mandated cutbacks in UDCs' spending and employment have caused worldwide decreases in demand and therefore output.

Deflation is not the only way to correct imbalances in external accounts. The alternative would be to correct surpluses through reflation: Surplus countries would try to eliminate their surpluses by increasing their spending so that their imports rise. The net effect on external accounts would be the same --because exports, output and incomes of deficit countries would be raised, their deficits would be lowered.

The IMF's original charter did include a "scarce currency" clause designed to encourage symmetry of adjustment by placing pressure on chronically surplus countries to bring their surpluses down. But the clause has never been invoked, and the Fund's approach has remained highly asymmetrical; the major burden of policy change and adjustment is imposed on deficit countries (Stewart, in King, 1990: 338).

Other aspects of IMF conditionality have had similarly negative effects when the same program is imposed on many countries at once. At the same time that the Fund's overall impact has been deflationary, so that basic demand for underdeveloped countries’ products has not been sustained, Fund programs have also tended to increase the supply of these products.

IMF country programs have been tailored to expand production of primary commodities --in some cases the same product in more than one country. For example both Ghana and the Ivory Coast have had programs to increase cocoa production. This upward shift in cocoa output, because it did not result from or cause an upward shift in demand, had the result that prices were driven down. In fact, for commodities with low demand elasticities --commodities for which a price cut does not induce a substantial rise in demand, since consumption is not much affected by price-- an increase in production may lower prices so much that a country's total earnings from those commodities actually fall. Past experience has shown that this is the case for many commodities, especially those in which some very poor countries specialize, such as cocoa, tea, and coffee (Stewart, in King, 1990: 338-9).

When the IMF encourages production increases from a number of major producers of particular commodities, without simultaneously taking action to increase demand for those commodities, the net result may be to decrease deficit countries' foreign exchange earnings from commodity production, while increasing the resources they devote to that production.

Fund programs have thereby contributed to primary producers' worsening terms-of-trade, which were in turn partly responsible for the limited improvements many underdeveloped countries were able to make in their current account balances. Therefore, IMF policy worked at cross purposes to its stated Keynesian goals.

Currency devaluations have often had a similarly damaging effect on the terms-of-trade of exporters of manufactured goods, since such devaluations lower the relative price that producers receive for their manufactured exports. But in this case, as opposed to that of primary commodities, there is more potential for the UDCs as a whole to increase their share of the world market. As a result, reduced prices may be more than offset by an increase in the quantity sold --provided of course that developed countries do not impose trade restrictions (Stewart, in King, 1990: 339). Or consider the appreciation of the Japanese yen, which essentially tripled in value between 1971 and 1991. Without a big jump in productivity, neoclassical economic logic would have predicted a dramatic drop in Japanese exports. Instead, productivity and exports continued to expand geometrically, and Japan’s trade balance with most of the world became even more favorable (see T. J. Pempel’s Regime Shifts: Comparative Dynamics of the Japanese Political Economy, 1998: 11).

According to its originally stated goals the IMF should be responsible for ensuring that the international environment be compatible with increasing world output, employment and development. Yet the IMF has not made its own programs, much less the world economy, consistent with these goals. The basic declarations of the Bretton Woods framers have not been realized, as the IMF has not evolved in such a way as to discharge its original responsibilities. The problem is not technical but political: The dominant governments which set the major limits on Fund functioning have imposed their own ostensibly technocratic (monetary) views on the IMF.

Most theorists did accept that UDCs would need long-term international credit in order to finance their industrialization programs. This, however, was defined as a "developmental" as opposed to a "monetary" need and it was to be provided by the World Bank, the private banks and the transnational corporations. Paradoxically the money that the IMF lends to a country makes that country able to continue to import for longer than would have been the case if IMF loans were not available. Without the IMF, abrupt cuts in spending and investment would have to be made to reduce the deficit. IMF assistance allows debtor countries to adopt policies that lead to a more gradual reduction in the deficit. Thus the intervention of the IMF makes possible a higher level of economic activity for deficit countries, especially given that the negotiation of an IMF agreement usually enables the country to also borrow extensively from the private banks (Brett, in Latin America Bureau 1983: 33-4).

Thus when an IMF team visits a country in order to negotiate a stand-by arrangement its primary concern is to reduce the balance of payments deficit within a relatively short period of time, usually within three to five years. The team assumes that direct state intervention is not necessary for the objective to be achieved, and that the balance of payments problem is caused by high local inflation that is itself caused by high government spending funded by a large supply of new money, which leads to high levels of local consumption in relation to the level of output of goods that can be sold abroad.

Given these assumptions such a team tends to require policies which emphasize reductions in consumption rather than an increase in production. It justifies its position by the fact that a country with a balance of payments deficit is consuming more than it is producing, by importing more goods than it is exporting. Unless such a country can obtain continuing supplies of international credit or aid for this process its economy must eventually come to a halt.

Although there is no unique profile for debtor countries, troubled debtors when compared to less strained ones are frequently characterized by a variety of the following traits:

(1) Large debts to private creditors relative to that owed to official lenders.

(2) High debt to exports ratios.

(3) Unprofitable investments and unsound financial strategies that do not provide buffers to economic slowdowns (and other general problems related to moral hazard, taking higher risks on the belief they will somehow be bailed out).

(4) High government deficits.

(5) Capital flight and overvalued exchange rates.

Yet the strength and length of the debt problem that depleted and debilitated the UDCs for over two decades are further related to a series of factors that slowed down their recovery endeavors:

(1) The adverse short-term effects of IMF sponsored austerity programs have been coupled with extended isolation from financial markets, to produce a delay in recovery in some countries.

(2) Negative resource transfers coupled with positive net flows of public and publicly guaranteed external debt have caused protracted financial strain.

(3) Substantially higher real interest rates on dollar denominated assets in the 1980s harmed debtors, while the dislocation of internal financial markets entailed unstable domestic rates that led to capital flight.

(4) Capital flight meant that new lending to underdeveloped countries went to finance capital outflows.

(5) Making matters worse, adverse terms-of-trade changes hit hard on a large number of UDCs, accentuating their difficulties (Rivera-Batizs, 1994: 264-7).

The 1980s and 1990s have thus seen the import substitution consensus of the previous decades, with its preference for high levels of tariff and nontariff trade barriers, all but evaporate in the underdeveloped countries which by and large pushed towards liberalization. The simplification of import procedures, reduction or elimination of quotas, and the rationalization of the tariff structure are the most commonly adopted liberalistic features.

Yet it is perplexing that the 1980s should have become the decade of trade liberalization in the underdeveloped countries. Because of the debt crisis that decade has also been one of intense macroeconomic instability. Common sense would suggest that the conventional benefits of liberalization become muted, if not completely offset, under conditions of macro-instability characterized by high and variable inflation on the one hand and fiscal and balance of payments crises on the other.

A period of macro-instability is the worst time to undertake a trade reform, yet paradoxically so many countries are doing it. The main reasons are to be drawn from the broader domain of geo-ecomics. First, a time of crisis makes possible the adoption of radical measures that would have been unthinkable in calmer times. The second and more important reason has to do with the role of foreign creditors and of the IMF and the World Bank.

The 1980s were a decade of great leverage for these organizations vis-à-vis debtor governments, especially where poorer African countries are concerned. The trade policy recommendations of the World Bank were adopted by cash starved governments frequently with little conviction of their ultimate benefits. This accounts for the high incidence of wobbling and reversal on the trade front. It also indicates that one ought not be very optimistic on the sustainability of liberalization in many of these countries.

When the debt crisis broke, with the announcement by Mexico in August 1982 that it could no longer meet its debt service payments, the IMF was to play a key role in the emergency rescue operation mounted to stave off default and avoid serious disruption to the financial system. Since the resources available to the Fund had fallen substantially in relative terms over the years, the role of the Fund would be less that of provider of liquidity, the function that it was pronouncedly established to perform, and more that of bailiff and policeman acting on behalf of the creditors. In this capacity the role of the Fund was to extract the maximum possible debt service payments from debtor countries with little regard to the effect that this would have on their economies.

This operation was carried out by a carefully calibrated process of organizing just enough liquidity to the debtors via new bank loans (so-called "involuntary" lending), rescheduling, World Bank lending, IMF loans, etc., to make it not worth their while to declare outright defaults (with all the costs to them that this would entail), and instead to continue cooperating with their creditors in servicing the loans. These policies were associated with the names of successive US Treasury Secretaries, first the Baker Initiative, then the Brady Plan (Adams, 1993: 153).

The key to these initiatives was the policy package of austerity measures which it was the role of the Fund to impose on the debtor countries. The main objective was to secure a rapid reduction in the current account deficit, and this was to be accomplished by the vigorous application of standard deflationary measures of which the main elements consisted of tight monetary policies, high interest rates, cut backs in government expenditures accompanied by increases in taxes and devaluation. These measures were duly applied and the current account deficit soon reduced or eliminated.

But as may be expected the effect of these policy measures was to put the economies of the debtor countries into reverse gear, sending them reeling in a downward spiral towards economic depression: The primary objective of the policy package was the collection of the debt and the protection of the interests of the creditors, and in this it largely achieved its aims. From the debtor, underdeveloped countries' point of view, however, the massive policy induced deflation to which they were subject meant a great deal of disruption to their social and economic life, and a major setback to their long-term economic development prospects. It was in Latin America and in Africa, the two continents where the debt problems were most acute, that the disruptions were the greatest.[186]

In the short-term the impact was felt most acutely in high urban unemployment, reduced earnings, economic deprivation and shortages of essential goods, and while most sections of the community had to bear part of the sacrifice, the heaviest brunt of the adjustment was borne by the poorest groups. This was the inevitable consequence of the Fund's approach to policy conditionality, whereby the traditional recipe of tight fiscal and monetary policies and currency devaluation is invariably supplemented by “structural adjustment” policies giving free rein to market forces and requiring the lifting of all constraints on full market pricing, including the elimination of subsidies on essential food and other basic necessities, with effects that bear particularly heavily on the poor.

The latter were also those most affected by the reductions in public expenditure on health, education, and social welfare, key elements in the Fund's package of conditionality. But the effects went beyond the short-term since these are expenditures which finance the basic investment in human capital, without which there can be no development. In many cases the severe manner in which expenditure on education was cut, and the low income and status to which teachers were reduced in the ensuing market oriented adjustment process, have so weakened the educational infrastructure in these countries as to greatly damage the prospects for rebuilding it (Adams, 1993: 155). This has disastrous consequences for their development prospects in the medium-term to long-term.

The sharp cut backs in imports that became necessary owing to the external financial squeeze also seriously undermined long-term development prospects. Underdeveloped countries typically depend on imports for a wide range of essential products to keep the economy going, most importantly for machinery and equipment to maintain and expand the productive base of the economy. Such sharp cut backs in imports seriously reduced availability of essential supplies and equipment and led to import strangulation of the economy: Falls in output and capacity utilization due to unavailability of imported inputs.

Such import strangulation also means inadequate maintenance of existing capital stock in transport, industry, agriculture and basic infrastructure, with adverse effects on production and, particularly in the poorer countries, shortages of essential imported inputs such as drugs, medical equipment, textbooks and other items necessary to keep the basic medical and educational services functioning. In many cases the unavailability of fuel, inputs and spare parts has also adversely affected export potential, making it all the more difficult for such countries to escape from the balance of payments trap in which they have found themselves.

Hence, while the Fund's declared aim is the promotion and maintenance of high levels of employment and real income, and the development of the productive resources of all members as primary objectives of economic policy (Article I [ii] of the IMF's Articles of Agreement), it was the Fund itself, in responding to the balance of payments crisis faced by underdeveloped countries in the early 1980s, that took the lead in imposing the policy measures responsible for the sharp cut backs in incomes and imports, massive unemployment, social deprivation and widespread deterioration in capital stocks and in productive capacity, that were the hallmark of the adjustment process to which these countries were subjected (Adams, 1993: 155-7).

It was a long road that the Fund had taken from its declared Keynesian conception, which sought an organization that could provide temporary liquidity to ease the pains of adjustment to balance of payments disequilibrium and thereby to promote the stability and growth of the world economy, to its present role of debt collector on behalf of private banks and enforcer of harsh policy conditionalities, that leaves little room for independent maneuver in countries which fall prey to it. In the process its purposes have surely been transformed, in practice if not in its legal constitution.

A further telling aspect of the changing nature of the IMF over the years concerns the evolution of the size of quotas relative to trade or other relevant variables. The size of quota determines the extent to which a member can have access to the resources of the Fund. Since potential need for resources can be expected to grow in proportion to the size of trade, one might have expected the idea to be that the size of quotas would grow pari passu with trade. But this is not what happened. Instead, the growth of quotas lagged far behind that of trade.

IMF quotas averaged about 16 percent of total imports in 1948, but by 1980 the proportion had fallen to less than 3 percent (Adams, 1993: 158-9). For the industrial countries themselves, this fall in the relative size of quotas was without significance since they had long ceased to turn to the Fund as a source of liquidity, having evolved alternative arrangements for this purpose. It was therefore the underdeveloped countries, which still depended on the Fund as a source of liquidity, that the quota policy affected, and this of course explains the reluctance to increase quotas.

As an alternative to increasing quotas a whole series of new access facilities was introduced. Apart from the original Credit Tranches these facilities include, or have included, the Extended Fund Facility, Supplementary Financing Facility, Policy of Enlarged Access, Compensatory Financing Facility, Cereal Import Facility, Buffer Stock Facility, and the Oil Facility. All in all members can now draw up to a cumulative total of over 600 percent of quota, compared with a limit of 125 percent of quota in the early years of the Fund.

But the consequence of this approach to enlarging access to Fund resources has been devastating from borrowers' points of view, since it has meant that access to low conditionality resources is now minuscule in relation to needs, amounting to only 25 percent of quota, while increasingly stringent conditionalities are imposed for access to the remaining 575 percent of quota. The result is that low conditionality resources are now virtually an extinct species and any meaningful access to the Fund's resources involves high conditionality. In this way the influence that the Fund is able to exert over members seeking any meaningful access to its resources has greatly increased.[187]

Not only was this niggardly policy towards quota increases pursued to the detriment of underdeveloped countries but equally niggardly has been the policy towards SDR allocations, with similar effect. Despite the Jamaica Agreement of 1976 under which the SDR was to become the principal reserve asset of the international monetary system, the developed countries have argued that there is no need for further SDR allocations since there is no shortage of liquidity. And for those countries of course there is certainly no shortage of liquidity.

Increases in the price of gold since the breakdown of the Bretton Woods monetary arrangement have meant large increases in the value of their reserves, since these were the countries that held the world's stock of monetary gold,[188] and this, together with the vast expansion of international commercial bank lending to which they have ready access, meant that their liquidity needs are fully met.

Only underdeveloped countries without access to commercial bank lending would be unable to find low conditionality, short-term finance, and hence would remain dependent on the IMF for their liquidity. The bulk of the Fund's resources can be expected to be channeled to countries that by and large are excluded from ready access to private capital markets. Countries enjoying such access probably will remain reluctant to sign up for conditional Fund assistance. After the debt crisis broke virtually all underdeveloped countries fell into the excluded category and most of them reluctantly had to sign up for conditional Fund assistance.

When the Fund approached the balance of payments disequilibrium created by the first oil shock in 1973, it took the sensible position that conceded that "attempts to eliminate the additional current deficit caused by higher oil prices through deflationary demand policies, import restrictions, and general resort to exchange rate depreciation would serve only to shift the payments problem from one oil importing country to another and to damage world trade and economic activity" (Adams, 1993: 161). It therefore called on oil importing countries to accept the consequent short-term deterioration in their balance of payments, and made available the Oil Facility at low conditionality to assist countries in financing the resulting payments deficit.

In contrast, in 1979-80, when the impact of the oil price rise on the balance was compounded by the effects of the interest rate rise, no reference was made by the Fund to the dangers of deflationary demand policies, nor was there any suggestion of the need to prevent damage to "world trade and economic activity." Nor, for that matter, was any attempt made to provide additional low conditionality resources to meet the resulting balance of payments deficits, notwithstanding that the logic of the argument put forward in 1974 applied with even greater force in 1979, given the deep recession that was developing. In the former case a number of industrial countries were among those facing large unforeseen deficits in their balance of payments and requiring support from the IMF, hence the much more lenient and reasonable treatment, while in the latter case only underdeveloped countries needed to turn to the IMF for support, the industrial countries being by then awash with liquidity and having full access to the pool of resources by then available in the international commercial banking system.

In addition, the new thinking in Washington was reflected in a general hardening of the Fund's access policy. Apart from the refusal to supply additional low conditionality resources, thereby forcing borrowing countries straightaway into the high conditionality upper credit tranches, there was also a general tightening of policy conditions that became harsher and overbearing, extending beyond the traditional macroeconomic variables relating to fiscal, monetary and exchange rate policies to include “structural adjustment” policies at the sectoral- and micro-levels.

There was also a hardening of IMF interest rate policy, with interest now being charged at close to market rates (Adams, 1993: 161). It is also common to have a number of important policy dictates in the formulation of an adjustment program. These normally include public sector policies on prices, taxes and subsidies, interest rate policy, exchange rate policy and income policy.

Further, the IMF has not set its programs within a cost minimizing framework. It has treated the balance of payments objective as overriding, and has been reluctant to give weight to other government purposes when designing stabilization programs. From the point of view of an underdeveloped country therefore the Fund's approach is potentially a high cost one.

As noted above, the power of the IMF over underdeveloped country borrowers was further made all the more formidable since, in the aftermath of the debt crisis, all other potential sources of credit, bilateral or otherwise, required an IMF stamp of approval (in effect, that an IMF high conditionality agreement be in place) before any credit was extended. This was a continuation and development of policies started as far back as the 1950s but was to assume particular importance in view of the tight financial squeeze which large numbers of underdeveloped countries now faced.

Concerning the purpose and justification of IMF conditionality, originally the imposition of conditions on a potential borrower was considered to be justified largely in terms of the need to ensure prompt repayment of drawing so as to safeguard the revolving character of the Fund's resources. But the kind of conditionality imposed in recent years cannot be justified on these grounds.

While the rationale for extending the scope of conditionality was ostensibly a laudable one (to respond to a concern that Fund policies should promote not only macroeconomic stability but also economic growth), it meant in practice that the Fund would have free rein to impose on the debtor underdeveloped countries the extreme versions of the free market construct which dominate US academic thinking and official policy making. Thus supply side economics[189] would now become standard fare in the policy matrix of debtor countries under IMF tutelage. All this served to make it much more painful to seek assistance from the Fund and to be on the receiving end of its policies.

For most underdeveloped countries that seek IMF assistance, IMF credits represent only a very small proportion of their total debt (Adams, 1993: 162-4). And given the high priority that all countries necessarily attach to meeting their repayment obligations to the IMF it is scarcely plausible to suppose that this formidable array of armor in the guise of conditionality can really be justified on these grounds. The real explanation must surely lie elsewhere.

Undoubtedly the proxy role the IMF plays as debt collector on behalf of the banks, not at all provided for among the Keynesian purposes of the Fund, better explains the severity of conditionality in recent years than the need to safeguard the revolving character of the Fund's resources. But the matter goes further than this. The rather religious zeal with which the IMF announces and insists on its standard package of austerity measures, almost without variation between countries except perhaps as regards the specific percentage targets to be achieved, disregards the complexity of getting into balance of payments difficulties in the first place.

Hence the merciless character[190] of the measures that are insisted upon, the "IMF knows best" syndrome. This character and its implications are best illustrated by a concrete case of applied “structural adjustment.” The Chilean experiment, the next section, is a case in point.

Evidently, the IMF and IBRD have been designed with the underlying objective of promoting capitalism; but with the demise of UDCs' unity under extensive pressures in the late 1960s and 1970s, the 1980s and 1990s, these organizations were used in a blatant unapologetic manner to impose upon underdeveloped countries the severest of postulates thought of in neoclassical think tanks spread across the USA.

Britain, in particular, among other industrial countries, was always there to support and rationalize the acts of the US led international organizations no matter what. Having lost the Empire upon which the sun never set, Britain is playing the traditional role of a fading hegemonic power --joining its successor as a junior partner-- and thus acting as a Trojan horse for the United States.

And writings of such arch economic liberals/libertarian Austrian authors as Carl Menger, Friedrich Wieser, Eugen von Böhm-Bawerk, Ludwig von Mises, Joseph Schumpeter, and Friedrich von Hayek, who were always concerned to justify the market system and to reject any and all forms of government participation in the economic affairs, provided the intellectual rationalization for such schemes.[191]

Meanwhile, under the Fund-Bank auspices, the UDCs had to run a lot faster to at most stay in the same place; some countries were negatively impacted upon (as is elaborated on below).

“Structural adjustment” might well imply a sought destination for a limited minority, but it offers little in the way of sustenance along the journey for the overwhelming majority. Its alternative must constitute an all encompassing transformation mechanism which relates means to ends, thus mitigating the horrible trip for strata not at all prepared for the arduous carnage. The mazes and jungles of neoclassical technocratic details therefore have no relevance to the situation of the billions of UDCs’ peoples, for the test of relevance is whether that theory informs policy makers about the predicament of those people at the wrong end of global capitalism, which neoclassical economics does not.

The socio-Darwinian evolution that subtly underlies “structural adjustment” has no basis whatever. And the theoretical basis upon which the Fund-Bank program is ostensibly built is nothing but a mythical concoction of neoclassical economics which made it up, reiterated it and eventually, perhaps, believed it.

Indeed manifold inconsistencies invalidate the entire theoretical edifice of that dominant school of economics. However, a myth dies hard, especially when it caters for the interests of the globally reigning strata: A myth never goes away as long as it continues to have an ideological utility, and powerful vested interests, in the long march of history, were immune to rational argument.

Empirically, however, even if neoclassical economics underwrites the achievements of contemporary postindustrial capitalism, which is certainly not the case, it is incompatible with the objective conditions prevalent in the UDCs today.

Nonetheless, an interesting phenomenon, an indication of the extent to which the DCs are now firmly in the driver's seat, is the high prestige currently enjoyed by the Bretton Woods' organizations, never mind also their role in putting the squeeze on debtor UDCs in the recent past. Such a prestige reflects, apart from anything else, the overriding power these organizations have come to wield, and the implanted perception by neoclassical economics of a lack of any practical alternatives to them.

This prestige also reflects the enthusiasm now being shown worldwide for membership and active participation in these organizations, notably by the Eastern European countries and those of the Commonwealth of Independent States. Indeed, there is now the prospect that in the not too distant future they will become truly universal in membership, while remaining under tight DCs' (particularly US) control.

Hence the international system created in the aftermath of WW II, heavily criticized and deeply distrusted in the UDCs as it is, and unreformed in any important way, now reigns supreme and its hegemony[192] is virtually unchallenged.

1.6 Bretton Woods In Action

In his visit to Chile in March 1975 Milton Friedman diagnosed for Chile’s Pinochet the cause of his country’s economic malaise and prescribed the solution: ‘"The immediate cause of inflation is always a larger increase in the money supply than in output.... The first need is to eliminate inflation and the only way in which Chile can finish with inflation is by eliminating drastically the fiscal deficit, preferably by reducing public expenditure.... Gradualism seems to me to be impossible"‘ (quoted in Robert Carty, in Latin America Bureau, 1983: 57).

In mid-April 1975 the drastic austerity formula which became widely known as the "shock therapy" was put in place. Following the IMF diagnosis that the ailment in Chile's economy was excessive demand, the authorities applied the Fund's recessionary remedy, a painful bleeding of the economy by intentionally contracting output. Public sector employment was frozen. Government spending was slashed with a one third cut in subsidies to public enterprises and a two thirds cut in government spending on housing and public works. Wage cuts suggested by the IMF were also implemented, resulting in a further decline in real incomes. And, in their zeal, the new Chilean disciples of neoclassical economics in charge of managing the economy strictly applied the IMF package in its entirety. They reduced tariff protection for the country's industries and generally moved towards opening the economy to foreign competition.

This “shock therapy” delivered a body blow to the economy.[193] The Gross Domestic Product decreased by 11 percent. Industrial production plummeted by more than 25 percent and capital investment fell below its already low levels. Small and medium sized enterprises protested against the treatment which was sending many of them into bankruptcy. However, it was the Chilean people who bore the brunt of the new measures. During 1975, real wages were almost 40 percent less than their 1969 level and the share of wages and salaries in the national income fell from a high of 63 percent in 1972 to 41 percent in 1976. The biggest sacrifice was made by those who lost their jobs. Unemployment, which averaged 5 percent in the 1960s and which had fallen to 3.1 percent in 1972, grew dramatically to 9.2 percent in 1974, 14.5 percent in 1975 and a peak of 20 percent in March 1976 (Carty, in Latin America Bureau, 1983: 60-1).

The recession caused by the “shock therapy” was the worst in 45 years and the 11.5 percent decline in output greatly surpassed the 3.6 percent fall in output registered in 1973.[194] If the 1974 through the 1980s “structural adjustment” period as a whole is considered, Chile's economic growth became much less than the Latin American average. On a per capita basis, the output of goods and services only returned to its 1972 level by the end of 1979. This partial and slow recovery of production was also accompanied by a regressive redistribution of wealth and by a faulty restructuring of the economy. Both processes were reinforced by the inflow of large amounts of foreign capital.

By 1978 the top six economic clans controlled two thirds of the total assets of Chile's largest 200 enterprises. This concentration of wealth contributed to increasing economic inequality. By that year the richest fifth of the population enjoyed more than half of the total national consumption while the poorest 60 percent of the people shared only 28 percent. The fortunes of the rich were won directly at the expense of the bottom 60 percent of income earners. In addition, the government's decrees on wage controls, reduction in its employment and cuts in its spending reinforced the unequal income distribution and even deepened impoverishment.

By 1980 real wages and salaries were still inferior to their 1969 level and almost a third below their 1971 high. The poorest were especially hard hit. Since 1973 the real value of the minimum family income earned by a fifth of the population had been cut in half. The social wages of Chileans have also been squeezed. By 1979 both government expenditure as a whole and outlays for social programs in particular were 10 percent less in real terms than in 1969. Spending on education, housing and health services remained well beneath the historical highs recorded under the previous government and as a result serious social problems in these areas remained unsolved (Carty, in Latin America Bureau, 1983: 61-3).

The restructuring of the economy resulted in growth in the tertiary (or service) sector, up from 52.5 percent of the economy in 1970 to 58 percent in 1980, but at the expense of the mining, agricultural and industrial sectors of the economy. Goods production as a whole declined from 1973 to 1979 while finance and banking activity, sectors enjoying access to foreign credit, were the main contributors to economic expansion. The manufacturing sector suffered the most. Many manufacturers never recovered from the “shock therapy.” A large number cut output and simply became importers.

By 1980 industrial employment was 10 percent less than in 1970 and 20 percent below its 1973 level. Some diversification of exports was achieved: Dependence on mineral exports declined from 83 percent of the total exports by value in 1974 to 60 percent in 1980. But the nation's export earnings remained highly dependent on natural resources and semiprocessed materials, leaving Chile still very vulnerable to fluctuations in price and demand on international markets. Apart from the growth of the service sector Chile virtually became a hewer of wood and drawer of water. However, the Achilles heel of the Chilean experiment is its failure to generate a sufficient amount of capital investment. If a country does not invest enough each year to replace worn-out or obsolete production facilities the nation's productive capacity will rapidly deteriorate. If it fails to invest today in its production base it will not have the ability to create new wealth tomorrow.

Chile's capital investment levels, a traditional weakness in an underdeveloped economy, were about half of the Latin American average for the 1974-79 period and the recession dealt them a further setback. This low level of capital investment points to a failure of the Smithian notion of "invisible hand." Part of the problem is due to the government's deliberate shrinking of its role in public works investment. But it is also due to decisions by Chilean investors to put their savings into nonproductive investments, including speculation, and both banking and corporate concentration. The low rate of capital investment is further caused by the pattern of direct foreign investment: Although the government bent-over backwards to attract direct foreign investment, actual inflows did not live up to expectations and most of the investment that materialized involved use of existing enterprises or supported commercial activities instead of contributing to new capital investment (Carty, in Latin America Bureau, 1983: 64-5).

Above all, the capital investment contradiction in the IMF recipe is a reflection of how large inflows of borrowed capital have been squandered by Chile's neoliberalism. Rich Chileans, like their counterparts privileged by IMF tutelage in other UDCs, used foreign loans to go on an international buying spree. Imports of nonessential consumer goods, including furs, alcohol, carpets and home entertainment equipment more than doubled from 1970 to 1978 in real terms and increased their share of total imports from 14 to 21 percent. But during the same period capital good imports remained static in nominal terms. The recipe's propensity towards imported consumption at the expense of capital investment and capital good imports worsened in the 1979 to mid-1982 period when the authorities maintained a fixed exchange rate and in so doing caused further damage to an already battered manufacturing sector. With capital good imports less than half of the value of nonessential imports the purchasing binge did not translate into a powerful productive base. In 1981 an unprecedented 58.4 percent of foreign exchange earned by Chile's exports had to be allocated to service the foreign debt.[195] But with a low level of capital investment the country was not generating the productive capacity to pay off its debt.

Chile's experience shows in part that dependence on external finance is a key factor influencing government policies. Part of this dependence derives from the underdeveloped status of the Chilean economy; in particular, its character as a producer of minerals vulnerable to the fluctuation in international markets. The ideology of Chile's rulers has also determined the country's degree of independence or the lack thereof. Adopting an incomes policy designed to increase the share of the pie going to labor, the previous Allende administration, upon coming to power in Chile, raised wages by 30 percent and froze most prices, thereby squeezing the profit rates. With more consumer demand, underutilized capacity was brought back into full production, consumer goods supplies were increased quickly, overhead costs were spread more efficiently and aggregate profits held up despite the lowering of the profit per unit. Thus, in its first year, the Allende administration increased real output by eight percent. Meanwhile, prices rose by a substantially smaller percentage than they did the previous year. “For the first time, an underdeveloped country...[had] been following a ‘structuralist’ policy rather than that of the ‘monetarists’ of the International Monetary Fund and the World Bank” (Lynn Turgeon’s Bastard Keynesianism: The Evolution of Economic Thinking and Policy-making since World War II, 1996: 103).

Despite external campaigns against it, the nationalist coalition formed by Allende resisted foreign financial pressures. In contrast, the Pinochet military government which ousted Allende (with CIA assistance) soon purged and repressed nationalist and progressive forces, and made Chile open and vulnerable to the influence of international financial institutions. The price paid by Allende for striving for independence was extremely high, but not uncommon in the UDCs (Carty, in Latin America Bureau 1983: 66-7). Governments dedicated to social justice have great difficulty in managing an economy in transition while trying to sustain both domestic political support, by providing subsidies for the poor, and access to international credit in a hostile international environment. Under the Pinochet government, therefore, the monetarist construct of the IMF became official doctrine, and throughout the 1974-1981 period the recipe's relationship to, and dependence on, the IMF and the private sources of capital was central to that government’s existence.

The IMF was able to exert direct and determinant influence on economic policy in 1975, the year “shock therapy” was fully applied and the model took on its complete shape. IMF seals of approval subsequently allowed the regime to wean the economy from official sources of external finance towards a heightened reliance on private banking sources. This change of sources allowed the government to ostensibly shift its external political dependency. After 1975 the continuing IMF approval of the recipe plus the blessing of international banks strengthened the position of the economic managers in the government. In this way continuing international financial support for the government sustained the regime's economic model. And because the model required repression the conclusion can be drawn that external finance has been instrumental in consolidating and perpetuating the repression in Chile (Carty, in Latin America Bureau, 1983: 67). Now Pinochet alone is deemed responsible for that repression.

In February 1983, Chile's showcase was in tatters: The government announced that it would stop repaying the principal on its US$17 billion foreign debt while it worked out a rescheduling agreement with its foreign bank creditors. This financial impasse followed a year in which the Chilean economy recorded a massive 13 percent fall in output, by far the worst result for any Latin American country. Unemployment reached 25.2 percent in Santiago in 1983, although that figure does not include the thousands of people employed on meager wages by the Government's emergency work program. A total of 431 bankruptcies was recorded during 1982 and by the end of the year Chile had accumulated a US$4.8 billion trade deficit. Although the world recession has compounded Chile's problems, low commodity prices[196] and high interest rates are not solely to blame. The government's insistence on maintaining an overvalued currency, thereby