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What Are the Different Theories of Economic Development?

In the United States, some geographic regions have a history of poverty because of a perpetual lack of economic development and growth.
Rural farming areas are generally weakened when people move to urban areas to seek out newly created jobs.
Theories of economic development are made in an attempt to explain how a country or region’s economy forms and thrives.
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  • Last Modified Date: 20 December 2014
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Theories of economic development are made in an attempt to explain how a country’s or region’s economy forms and thrives, and these theories are often used to make laws and policies. Social theories of economic development focus on social issues to improve the economic status of an area. Neoclassical economic development theories usually focus on a free market with fewer government controls and restrictions to help businesses grow at a quicker rate. Technology often plays a role in economic development, and exogenous growth theories center on this facet. With the Harris-Todaro (HT) view of economics, adding urban jobs may end up decreasing overall jobs, especially in developing areas.

Education, poverty and health are some of the social issues that often affect economics and, in social theories of economic development, these are the key issues. For example, these theories say that someone who gets an education and has a family that does not experience poverty will best be able to boost the economy. By using these theories, the government may create laws or acts that improve these social issues in an effort to increase the economy. These theories tend to work best in areas that are already developed, and they are usually supplementary in developing areas.

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In neoclassical theories of economic development, governmental controls and restrictions only serve to keep the economy from properly developing. For example, if a business is able to grow at a natural rate and not a rate prescribed by the government, it will best help the economy. If the government agrees with these theories, it will usually place light restrictions on businesses.

Exogenous growth theories of economic development center on technological advancements to boost the economy. These technological advancements may be as complex as a cutting-edge computer system or simple as a loom. Making better technology, and making new technology more accessible to businesses, improves the economy within the realm of these theories.

When the government helps make new jobs, the jobs generally are made in the urban sector. While this may seem sensible, the HT view on economics says that adding jobs in rural areas usually is better. This is commonly true for developing countries and regions that need strong rural positions. When urban jobs are made, people in the rural area will move to the urban area, which leads to less farming and food productions, which tends to weaken the area and the economy.

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Markerrag
Post 2

@Logicfest -- You make a very good point, but keep in mind that the government is called on all the time to get involved in the economy. When a government -- any government -- engages in a policy of stimulus spending, it is getting involved in the economy.

And there's nothing wrong with that so long as more jobs are created and enough additional payroll taxes are collected to pay for the stimulus spending. If enough taxes are not generated to pay off the stimulus spending, then the stimulus package was a waste of money.

Logicfest
Post 1

Haven't those neoclassical views of economic development been proven time and time again? When the government gets involved in the economy, it never grows or contracts naturally and chaos results.

Have a look at the United States, for example. Let's say the government is worried about slow housing markets, so it starts paying people to purchase homes (that actually happened). What does that policy do? It simply delays the inevitable. People will buy a bunch of homes in the short term, but markets will slump again down the road. That is because the government has stimulated immediate buying, thus shifting the demand from in the future to the present.

There will still be a housing slump in that scenario. It will come later rather than sooner, however. That is not a good thing.

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