Notes on SEQ 2001: A Plan for an Under-developed Economy - Philosophy

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Why economics can't really explain economic growth and development

A philosophical comment: Economics has difficulty explaining economic growth and development because it tries to be like a natural 'science' and understand the workings of an economy. In order to do this, it assumes that an economy tends towards equilibrium. This involves the further assumption that the relationships within the economy are fixed (ie that technologies, organisations, legislation do not vary, so that its behaviour is understandable in terms of a set of equations). However it is the changes to those relationships (ie economic development) which is probably the main factor in growth. Development can not be understood or managed by the quantitative equilibrium methods used by mainstream economics, because development involves the evolution of qualitatively new relationships in an economy (which is equivalent to changing the 'laws of behaviour' or 'parameters in the equations' governing its behaviour). For example, growth theories use equations such as: Y = A f(K,L) where Y = production; A = state of technology; and f( ) is a function of capital (K) and labour (L). However, A f( ) should not be seen as a production function, but as a production 'system' in which the relationships can be changed by development. Faster growth can be achieved by altering the 'laws of behaviour' of the production system than by just changing the input quantities. Rapid economic development and growth in East Asia can be best understood by recognising that the characteristic means for making progress is not based on reasoning (the technique the West inherited from ancient Greece) but on Chinese Taoism which 'makes progress' by changing real systems directly and thus alters A f( ). This is equivalent to changing the force of attraction between two bodies by altering the gravitational constant (G) or the square power relationship, in Newton's Law of Gravitation (F = G m M / r2). Such changes are not possible in the physical sciences, but are feasible in social systems. Japan's industrial success was not based on technological innovation (as was that of the UK, USA, Germany etc) but rather on organisational innovation (see Craig J., Transforming the Tortoise: A breakthrough to Improve Australia's Place in the Economic Race?, 1993). Economic development is a way of enhancing the productive capability of an economy, but is not a solution to all economic management (eg macro-economic management is a separate requirement).