Economic Development

One of the most unfortunate effects of the dominance of Walrasian theory has been its influence on the analysis of problems of economic development. When the economic system is conceived as a system that is always in a state of general equilibrium, shifts in that position of equilibrium can be attributed only to changes in exogenous variables. For an economy that is ‘undeveloped’ this means that someone must bring about changes in one or more of these exogenous variables. In the modern world, that ‘someone’ inevitably is the government. The principal exogenous variables on which attention is focused by the theory are supplies of labour and capital. Although technology could also be regarded as a variable, this runs against the basic assumption of neoclassical theory that technology is a free good. If technology is free, it cannot differ between different firms, whether they operate in a less developed economy or in a developed economy. As one economist wrote, ‘the laws of science are the same everywhere’. On this view, it can only be a symptom of lack of understanding of economic theory that induces poorer countries to cry out for international measures to promote the transfer of technology.