Development Economics

The paper is part of a larger project aimed at revitalizing what Paul Krugman has called "high development theory." It examines the roots of development economics, focusing on the seminal contributions of Europeans who emigrated to the UK and the United States in the 1930s. That body of theory became very influential in the 1950s and 1960s. It was virtually pushed out of economic theory and research by the new trends in economic analysis. Krugman has a particular viewpoint on the reasons for this demise. The problem is that high development theory was, in essence, discursive and nonmathematical. Discussing the reasons for this dismissal, Krugman identifies a basic model in which modernization is a self-sustaining process centered on the interaction between scale economies and market size. That is hard to fit into standard competitive analysis and so, he argues, it was abandoned. There is, however, much more than that to the history and theory of development economics. The paper examines in particular the views of Albert Hirschman and his analysis of induced investment and development as a chain of disequilibria. The paper argues that a possibly fruitful way to update and advance the original insight of development economics is to focus on the process of market formation and calls attention to the different ways the question can be articulated in developed and developing economies. In developed economies, the main problem is to overcome the tendency toward market saturation. In developing economies the main problem is to build up the domestic market. Constraints may arise from income distribution, social conflicts, and environmental problems. The focus on market formation helps to shape a research agenda that, while "rethinking" development economics, can address the formidable challenges posed by the development of a heterogeneous periphery dominated by the new giants in Asia and Latin America.