DV400 SUMMARY
MICHAELMAS TERM
Outline
1. W1: Development in an Era of Crises
2. W2: States and Markets in Early Development OK
3. W3: Colonialism, Modernisation and Dependency
4. W4: States Taming Markets: The “Big Push” for Development, 1945-1975 OK
5. W5: The Rise of ‘Neoliberalism’
6. W7: Developmental States in Comparative Perspective
7. W8: Good governance and Institutional Reform
8. W9: The Rise of the South
9. W10: Financialisation, Global Inequality and the Rise of Populist Politics
10. W11: Development Paradigm Shifts: Rise of Business as a Development Agent
WEEK 2 - States and Markets in Early Development
READINGS
Hayek (1945) - The Use of Knowledge in Society
The question is not how to solve economic problems, what to do if we were to plan it. We already know
how to do that. Problem is that in order to do it properly one would need ALL the KNOWLEDGE
concerning the economy gathered together (we know the formula but not all the numbers). This
knowledge is divided and dispersed among individuals and institutions, never together. It is not about
whether “planning” of the economy should be done, rather who should do it. Three possibilities:
- Government: centralized planning
- Individuals: Decentralized planning / self-regulation
- Organized industry: monopoly
“Which of these systems is likely to be more efficient depends mainly on which of them we can expect
that fuller use will be made of the existing knowledge”. Which kind of knowledge has more relative
importance?
Some might claim that the scientific knowledge that governments possess is the most important.
However, Hayek points at two pieces of information that only individuals have: time and place. That is,
how individuals benefit (even make a living) from possessing a unique piece of information which is
beneficial as long as he keeps it to himself. Ex: arbitrageur. This kind of knowledge is looked down upon
(don’t know why), but it is important that society makes use of it. A central planner will not have this
kind of detailed information on ‘changes’, which is imperative for production planning. Hence:
,“If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in
the particular circumstances of time and place, it would seem to follow that the ultimate decisions must
be left to the people who are familiar with these circumstances, who know directly of the relevant
changes and of the resources immediately available to meet them” → Individuals, self-regulation.
But: “There still remains the problem of communicating to him such further information as he needs to
fit his decisions into the whole pattern of changes of the larger economic system”.
KEY SOLUTION: price system! It does not matter for an individual why or how a change in
demand/supply of a material/good happens, only how much more or less difficult it has become to
produce something: THEIR RELATIVE VALUE/IMPORTANCE, which will be reflected in its PRICE. The price
system attaches a numerical index to a resource that is not derived from any intrinsic value it may
possess, rather it “reflects (…) its significance in view of the whole means-end structure”. All relevant
information is condensed into a price. If only some individuals learn about a change in price of a
material, they will act upon this privilege information (time and place advantage), and it will rapidly
spread throughout the whole economy.
Hence:
“The whole acts as one market, not because any of its members survey the whole field, but because
their limited individual fields of vision sufficiently overlap so that through many intermediaries the
relevant information is communicated to all. The mere fact that there is one price for any commodity
(…) brings about the solution which (…) might have been arrived at by one single mind possessing all
the information which is in fact dispersed among all the people involved in the process”. Thus, price
system = mechanism of communication. Pricing as a way to aggregate knowledge in a system to properly
distribute resources. Also, he sees labor allocation (division of labor) as both an extension of efficient
resource allocation and as a ‘natural development that humans stumbled upon’; (both of these points
are diametrically opposed to Polanyi’s thoughts on markets).
Such a system is a “marvel” because it unconsciously moves individuals into the right direction without
them knowing that their action is the right one. Individuals unconsciously solve a problem which could
not be solved consciously. = Adam smith’s invisible hand: individuals by seeking his own interest do what
is in the general interest.
Thus, Hayek sees markets are a natural development, since they spontaneously arise if self-interested
individuals are left alone.
Final remarks: 1) Assumption of perfect information of the planner (as done by some economists)
completely disregards the actual problem: the fact that this knowledge is spread among all individuals.
“The unavoidable imperfection of man's knowledge and the consequent need for a process by which
knowledge is constantly communicated and acquired”. 2) Any approach which starts off by assuming that
people’s knowledge corresponds with objective facts of the situation, systematically leaves out what is
our main task to explain.
,Polany (2001) - The Great Transformation
CH 6
Before 19thcentury
Economy embedded in Society
“Never before our own time were markets more than accessories of economic life. As a rule, the
economic system was absorbed in the social system, and whatever principle of behavior predominated
in the economy, the presence of the market pattern was found to be compatible with it”. “Regulation
and markets, in effect, grew up together. The self-regulating market was unknown; indeed the
emergence of the idea of self-regulation was a complete reversal of the trend of development.”
Markets have always been regulated. Especially labor and land, which were embedded in the general
organization of society and institutional norms, never being objects of commerce. Not even during
mercantilism expansion, which was the start of ‘globalisation’. Overall characterized by: reciprocity,
redistribution and householding, which together ensured order in the production and distribution of
goods through customary rules, while keeping the economy subject to societal needs.
After 19thcentury (industrial revolution)
Economy has overthrown society → new market society (p. 71 definition): ‘economic system controlled,
regulated, and directed by market prices; order in the production and distribu- tion of goods is entrusted
to this self-regulating mechanism’, assumes that all individuals behave in self-interest (methodological
individualism) and that the state should not intervene, market should be ‘the only organizing power in
the economic sphere’.
Development of factories has changed economic structure deeply. It was not a natural process, rather
states subordinated society to market principles. While before the economic order was merely a function
of the social order, now economic activity is isolated from it.
“A market economy can exist only in a market society”: this means that for a market economy to
function, it must comprise ALL elements of production/industry, including labor, land, and money; and
society must subordinate to these requirements. But since land and labor are no other than human
beings and the surroundings where they exist, “to include them in the market mechanism means to
subordinate the substance of society itself to the laws of the market”.
- But, how has the market mechanism managed to control land, labor and money?
By making them ‘fictitious commodities’. Basically, a commodity is an object produced for sale in the
market. For a self-regulating market to work, every element of industry must be a commodity, it must
have a price so that it can interact with supply and demand mechanisms. In practice this means that there
must be markets for every element of industry, which then form One Big Market.
, Problem: labor, land and money are vital elements of industry, and thus must have a market, but they ARE NOT
COMMODITIES (because they have not been produced for sale - against commodity definition). Thus, their
commodification is entirely fictitious:
- Labor: is only another name for a human activity which goes with life itself, which in its turn is not
produced for sale but for entirely different reasons
- Land: is only another name for nature, which is not produced by man;
- Money: is merely a token of purchasing power which, as a rule, is not produced at all, comes into being
through the mechanism of banking or state finance
It is with the help of this fiction that markets of land, labor and money are organised, and any
interference with their supply/demand would endanger the self-regulation of the system. Thus, the
commodity fiction “supplies a vital organizing principle in regard to the whole of society affecting almost all its
institutions” = society subordinate to markets.
The extension of the market mechanism to the elements of industry—labor, land, and money— was the inevitable
consequence of the introduction of the factory system in a commercial society. But as the organization of labor is
only another word for the forms of life of the common people, this means that the development of the market
system would be accompanied by a change in the organization of soci- ety itself. All along the line, human society
had become an accessory of the economic system.
- Effects?
“To allow the market mechanism to be the sole director of the fate of human beings and their natural environment
(...) would result in the demolition of society”. “No society could stand the effects of such a system (…)
unless [the state] protected against the ravages of this satanic mill”. Thus, people call for protection.
- Double-movement:
Market societies (self-regulated) is a utopian project. Whenever there is an extreme attempt to treat
these non-commodities as commodities, there would be reactions from society that would call on the
state to intervene in markets. Hence, state is NECESSARY for markets to function.
“Social history in the nineteenth century was thus the result of a double movement: the extension of the
market organization in respect to genuine commodities was accompanied by its restriction in respect to
fictitious ones. While on the one hand markets spread all over the face of the globe and the amount of
goods involved grew to unbelievable dimensions, on the other hand a network of measures and poli-
cies was integrated into powerful institutions designed to check the action of the market relative to
labor, land, and money”. → “Society protected itself against the perils inherent in a self-regulating
market system”.
The great transformation: when the fiction of self-regulation can no longer hold and societies demanded
states to subordinate the economy to social goals.
Historical examples: Socialism: Bolshevik revolution;New deal: US Roosevelt; Fascism: Germany
MICHAELMAS TERM
Outline
1. W1: Development in an Era of Crises
2. W2: States and Markets in Early Development OK
3. W3: Colonialism, Modernisation and Dependency
4. W4: States Taming Markets: The “Big Push” for Development, 1945-1975 OK
5. W5: The Rise of ‘Neoliberalism’
6. W7: Developmental States in Comparative Perspective
7. W8: Good governance and Institutional Reform
8. W9: The Rise of the South
9. W10: Financialisation, Global Inequality and the Rise of Populist Politics
10. W11: Development Paradigm Shifts: Rise of Business as a Development Agent
WEEK 2 - States and Markets in Early Development
READINGS
Hayek (1945) - The Use of Knowledge in Society
The question is not how to solve economic problems, what to do if we were to plan it. We already know
how to do that. Problem is that in order to do it properly one would need ALL the KNOWLEDGE
concerning the economy gathered together (we know the formula but not all the numbers). This
knowledge is divided and dispersed among individuals and institutions, never together. It is not about
whether “planning” of the economy should be done, rather who should do it. Three possibilities:
- Government: centralized planning
- Individuals: Decentralized planning / self-regulation
- Organized industry: monopoly
“Which of these systems is likely to be more efficient depends mainly on which of them we can expect
that fuller use will be made of the existing knowledge”. Which kind of knowledge has more relative
importance?
Some might claim that the scientific knowledge that governments possess is the most important.
However, Hayek points at two pieces of information that only individuals have: time and place. That is,
how individuals benefit (even make a living) from possessing a unique piece of information which is
beneficial as long as he keeps it to himself. Ex: arbitrageur. This kind of knowledge is looked down upon
(don’t know why), but it is important that society makes use of it. A central planner will not have this
kind of detailed information on ‘changes’, which is imperative for production planning. Hence:
,“If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in
the particular circumstances of time and place, it would seem to follow that the ultimate decisions must
be left to the people who are familiar with these circumstances, who know directly of the relevant
changes and of the resources immediately available to meet them” → Individuals, self-regulation.
But: “There still remains the problem of communicating to him such further information as he needs to
fit his decisions into the whole pattern of changes of the larger economic system”.
KEY SOLUTION: price system! It does not matter for an individual why or how a change in
demand/supply of a material/good happens, only how much more or less difficult it has become to
produce something: THEIR RELATIVE VALUE/IMPORTANCE, which will be reflected in its PRICE. The price
system attaches a numerical index to a resource that is not derived from any intrinsic value it may
possess, rather it “reflects (…) its significance in view of the whole means-end structure”. All relevant
information is condensed into a price. If only some individuals learn about a change in price of a
material, they will act upon this privilege information (time and place advantage), and it will rapidly
spread throughout the whole economy.
Hence:
“The whole acts as one market, not because any of its members survey the whole field, but because
their limited individual fields of vision sufficiently overlap so that through many intermediaries the
relevant information is communicated to all. The mere fact that there is one price for any commodity
(…) brings about the solution which (…) might have been arrived at by one single mind possessing all
the information which is in fact dispersed among all the people involved in the process”. Thus, price
system = mechanism of communication. Pricing as a way to aggregate knowledge in a system to properly
distribute resources. Also, he sees labor allocation (division of labor) as both an extension of efficient
resource allocation and as a ‘natural development that humans stumbled upon’; (both of these points
are diametrically opposed to Polanyi’s thoughts on markets).
Such a system is a “marvel” because it unconsciously moves individuals into the right direction without
them knowing that their action is the right one. Individuals unconsciously solve a problem which could
not be solved consciously. = Adam smith’s invisible hand: individuals by seeking his own interest do what
is in the general interest.
Thus, Hayek sees markets are a natural development, since they spontaneously arise if self-interested
individuals are left alone.
Final remarks: 1) Assumption of perfect information of the planner (as done by some economists)
completely disregards the actual problem: the fact that this knowledge is spread among all individuals.
“The unavoidable imperfection of man's knowledge and the consequent need for a process by which
knowledge is constantly communicated and acquired”. 2) Any approach which starts off by assuming that
people’s knowledge corresponds with objective facts of the situation, systematically leaves out what is
our main task to explain.
,Polany (2001) - The Great Transformation
CH 6
Before 19thcentury
Economy embedded in Society
“Never before our own time were markets more than accessories of economic life. As a rule, the
economic system was absorbed in the social system, and whatever principle of behavior predominated
in the economy, the presence of the market pattern was found to be compatible with it”. “Regulation
and markets, in effect, grew up together. The self-regulating market was unknown; indeed the
emergence of the idea of self-regulation was a complete reversal of the trend of development.”
Markets have always been regulated. Especially labor and land, which were embedded in the general
organization of society and institutional norms, never being objects of commerce. Not even during
mercantilism expansion, which was the start of ‘globalisation’. Overall characterized by: reciprocity,
redistribution and householding, which together ensured order in the production and distribution of
goods through customary rules, while keeping the economy subject to societal needs.
After 19thcentury (industrial revolution)
Economy has overthrown society → new market society (p. 71 definition): ‘economic system controlled,
regulated, and directed by market prices; order in the production and distribu- tion of goods is entrusted
to this self-regulating mechanism’, assumes that all individuals behave in self-interest (methodological
individualism) and that the state should not intervene, market should be ‘the only organizing power in
the economic sphere’.
Development of factories has changed economic structure deeply. It was not a natural process, rather
states subordinated society to market principles. While before the economic order was merely a function
of the social order, now economic activity is isolated from it.
“A market economy can exist only in a market society”: this means that for a market economy to
function, it must comprise ALL elements of production/industry, including labor, land, and money; and
society must subordinate to these requirements. But since land and labor are no other than human
beings and the surroundings where they exist, “to include them in the market mechanism means to
subordinate the substance of society itself to the laws of the market”.
- But, how has the market mechanism managed to control land, labor and money?
By making them ‘fictitious commodities’. Basically, a commodity is an object produced for sale in the
market. For a self-regulating market to work, every element of industry must be a commodity, it must
have a price so that it can interact with supply and demand mechanisms. In practice this means that there
must be markets for every element of industry, which then form One Big Market.
, Problem: labor, land and money are vital elements of industry, and thus must have a market, but they ARE NOT
COMMODITIES (because they have not been produced for sale - against commodity definition). Thus, their
commodification is entirely fictitious:
- Labor: is only another name for a human activity which goes with life itself, which in its turn is not
produced for sale but for entirely different reasons
- Land: is only another name for nature, which is not produced by man;
- Money: is merely a token of purchasing power which, as a rule, is not produced at all, comes into being
through the mechanism of banking or state finance
It is with the help of this fiction that markets of land, labor and money are organised, and any
interference with their supply/demand would endanger the self-regulation of the system. Thus, the
commodity fiction “supplies a vital organizing principle in regard to the whole of society affecting almost all its
institutions” = society subordinate to markets.
The extension of the market mechanism to the elements of industry—labor, land, and money— was the inevitable
consequence of the introduction of the factory system in a commercial society. But as the organization of labor is
only another word for the forms of life of the common people, this means that the development of the market
system would be accompanied by a change in the organization of soci- ety itself. All along the line, human society
had become an accessory of the economic system.
- Effects?
“To allow the market mechanism to be the sole director of the fate of human beings and their natural environment
(...) would result in the demolition of society”. “No society could stand the effects of such a system (…)
unless [the state] protected against the ravages of this satanic mill”. Thus, people call for protection.
- Double-movement:
Market societies (self-regulated) is a utopian project. Whenever there is an extreme attempt to treat
these non-commodities as commodities, there would be reactions from society that would call on the
state to intervene in markets. Hence, state is NECESSARY for markets to function.
“Social history in the nineteenth century was thus the result of a double movement: the extension of the
market organization in respect to genuine commodities was accompanied by its restriction in respect to
fictitious ones. While on the one hand markets spread all over the face of the globe and the amount of
goods involved grew to unbelievable dimensions, on the other hand a network of measures and poli-
cies was integrated into powerful institutions designed to check the action of the market relative to
labor, land, and money”. → “Society protected itself against the perils inherent in a self-regulating
market system”.
The great transformation: when the fiction of self-regulation can no longer hold and societies demanded
states to subordinate the economy to social goals.
Historical examples: Socialism: Bolshevik revolution;New deal: US Roosevelt; Fascism: Germany
