GEOG 3404 Economic Geography

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GEOG 3404Economic Geography
LECTURE 3 Modernisation, Dependency and
World-Systems Theory

• Dr. Zachary Klaas
• Department of Geography and Environmental Studies
• Carleton University

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Geographically-based theories of political economy

• Todays lecture is about political economy, or
  how economics is a conditioning element of
  political decision-making.
• We will contrast, in this lecture, three popular
  political economic theories about how the world
  economy functions. These theories generally go
  by the names
• modernisation theory
• dependency theory and
• world systems theory.
• These political economy theories posit certain
  assumptions about
• how the factors of production are employed in the
  process of economic development
• what social groups are benefited or harmed by the
  process of economic development and
• what economic policies should be pursued
  generally.

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Unequal exchanges between factors of production
in the world economy?

• In our last lecture, we observed that land as a
  factor of production was considered problematic
  by some of the early political economists
  (principally David Ricardo and Henry George).
• The source of the problem lies in scarcity.
  Political economists like Ricardo and George
  observed that landowners could profit in an
  exchange merely because they owned scarce natural
  resources.
• In this exchange, they are not being rewarded for
  their productive use of the land, or any
  improvements made on the land for later use.
  They are merely being rewarded for having control
  over the land as private property under
  conditions where similar land is scarcely
  available.

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Possible economic elite 1 Owners of land /
natural resources

• By this theory, notably propounded in Henry
  Georges Progress and Poverty, landowners are a
  natural (and unjust) economic elite. Their
  ability to collect a payment for the usage of
  land is entirely dependent upon their control
  over private property in land/natural resources,
  and because they have this unjust control, they
  must compensate the community by paying a tax on
  land/natural resource value. (This is the
  essence of Georges famous single tax
  proposal.)
• Georges theory states that the three factors of
  production each are paid some return
• Land is paid economic rent or simply put, rent
• Labour is paid wages and
• Capital is paid interest (essentially, the
  dividends on the productive investments of
  investing capitalists).

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Returns and productivity A theme in political
economy

• Note that, for Henry George, of the three returns
  on the factors of production, only rent is
  defined as an unjust return on unproductive
  activity the ownership over scarce land and/or
  natural resources. Wages and interest are, in
  Georges view, returns on productive activity
  (hard work in the case of labour, selecting more
  efficient and productive industrial practices in
  the case of capital).
• In the case of Georges theory, the return which
  rewards unproductive activities primarily is
  collected by those associated with one factor of
  production (land), and this return comes at the
  expense of the others (labour and capital).
• George referred to this reward as the extraction
  of an unearned increment, paid unjustly to
  elitist landowners and natural resource owners by
  productive labourers and capitalists.

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The declining importance of land?

• With the beginning of the Industrial Revolution,
  the character of political control in
  industrialising countries changed. The old
  landed gentry began to progressively lose control
  over economic affairs, while the owners of
  industrial business firms began to gain
  prominence.
• The old landed gentry in Europe was understood by
  the conventions of the times to be the upper
  class in the economic and cultural system,
  because of their control over land. Now,
  however, their power was being rivaled by the
  owners of these industrial firms, the rising
  middle class or bourgeoisie.
• The middle class, by this definition, were those
  individuals owning the means of economic
  production in other words, those owning
  capital. It was beginning to seem, in this
  period, that the power of landowners was being
  eclipse by the power of capitalists.

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The labour theory of value and the rise of capital

• We have already spoken at length now about the
  value attributed to land in the political
  economic thought of many individuals living
  around the time of the 17th, 18th and 19th
  Centuries. However, we should also note that
  some influential arguments were shortly to be
  made about the importance of labour and capital
  as factors of production.
• First of all, the political philosophy of John
  Locke also had a dimension which introduced a
  notion called the labour theory of value to
  political economy. By this view, scarcity of
  natural resources was not the only thing which
  gave things economic value. Another very
  important element of value was the mixture of
  human labour with those natural resources in the
  process of economic production.

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Possible downtrodden class 1Workers

• Starting with Locke, then, political economists
  started to see labour as something which defined
  a possible class of losers in an organised
  economy. Those believing that landowners were a
  natural economic elite often also saw labourers
  as a primary group from which this elite
  extracted value.
• Karl Marx, in his multi-volume political economy
  treatise Capital, picked up Lockes notion of the
  labour theory of value in order to case workers
  as a dominated class, which offered up its
  productive work, but received no fair return for
  its industriousness.
• The iron law of wages, a popular economic
  notion of the 19th Century, reflected an
  awareness of the inappropriately low reward
  workers received for their efforts. The iron
  law stated that workers would be paid the lowest
  amount possible which would not at the same time
  threaten their ability to remain alive.

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Surplus value

• Presumably, if labour was compensated according
  to its productivity, merely paying workers the
  barest amount necessary just to keep them alive
  to work another day would be vastly
  inappropriate.
• Marx believed, however, that labours just
  compensation, according to Lockes labour theory
  of value, was being appropriated by others. Marx
  called this amount being extracted from the
  working class by the name surplus value.
• The form surplus value takes in Marxs work is
  M C M (money ? invested in commodities
  ? makes more money for
  the investor)The additional money made off the
  investment in the commodity is the surplus value,
  but it is not, in Marxs view.)
• Note the similarity of this view to Georges view
  concerning the unearned increment appropriated
  by the landowner. Its the same concept,
  essentially, but with a different factor of
  production profiting.

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Capital

• Karl Marxs work in Capital, however, breaks with
  previous work in political economy for more
  reasons than his appeal to Lockes labour theory
  of value. It also places greater emphasis on
  capital as the taker of surplus value.
• Marxs view was that land was not valuable in
  itself, but rather for its capacity to be used
  somehow in production in other words, for its
  ability to be used as natural capital. The owner
  of such land, therefore, was not properly classed
  as a landowner, but rather as a capitalist.
• Furthermore, though it is similarly possible to
  conceive of labour as human capital, a mere
  labourer has nothing to contribute to economic
  exchange but labour, which perhaps can be done by
  others, and has no control over the economy
  unless he is able to control the means of
  economic production, the tools and machines used
  to do the work failing this, the worker is
  dependent upon those who do control them.

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Possible economic elite 2 Owners of capital

• Marxism introduced the world to a political
  economic theory that hypothesised that
  capitalists constitute an unjust economic elite.
• In Marxs view, the earlier idea that it was the
  landowners which constituted this elite was
  discredited by the obvious rise to political
  power of the middle class/bourgeoisie in
  industrialised countries all over the world and
  their eclipsing of the power of the landed
  gentry.
• Marx was aware of Henry Georges ideas and
  dismissed Georges views as archaic for these
  reasons he thought it was self-evident that
  landowners had ceased to be the kind of
  unchallenged elite that George claimed them to
  be.
• The solution to the problem posed by the power of
  the capitalists, for Marx, was the expropriation
  and socialist ownership of the capital they
  controlled.

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Marx vs. George Some interesting points

• Marxs socialist remedy for the gap in power
  between capitalists and workers seemed to respond
  to the concerns of European workers quite nicely.
  There are some compelling theoretical reasons
  for this, though, to be found in the general
  unavailability of land in Europe.
• European workers did not have an available option
  of claiming unclaimed land and creating their own
  goods from the land/natural resources they owned.
  Consequently, in order to remedy their lack of
  power, they would be more likely to heed Marxs
  call to revolution against the capitalist elite.
• In the New World, however, where land was being
  claimed as private property through homesteading
  and land office transactions, there was another
  option available to discontented workers, at
  least until the time of the closing of the
  American frontier in the early 20th Century.

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A quick comparison
George Marx
Land Landowning elite (takes unearned increment) Land only important for use as capital
Labour Productive labourers lose out Productive labourers lose out
Capital Productive capitalist investors lose out Capitalist elite (takes surplus value)

• Some questions we could ask
• Is it obvious that the factors of production
  could only relate in these ways? Could some of
  these elites ever lose out, and could some of
  these losers ever become elites?
• George thinks land takes unfair advantage over
  other factors of production, and Marx thinks
  capital does. Could labour ever do so? (For
  example, perhaps intellectual labour might be
  scarce enough for labour to be able to claim an
  unearned increment?)
• Has ownership of land/natural resources
  completely lost its relevance in this kind of
  framework? After all, if it were possible to
  have access to a different source for or kind of
  natural resources, it might be possible to make
  new capital.

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Modernisation theory, dependency theory and world
systems theory

• Today, three major political economy theories are
  advanced as basic descriptors of whats going on
  in the world economy. These theories largely
  pick up where the theories weve just been
  describing left off.
• Modernisation theory emphasises the movement away
  from landownership and towards capital investment
  as important in the promotion of economic
  development.
• Dependency theory picks up on the theories of
  unearned increment and surplus value to
  isolate the tendency of economic elites to
  extract value away from local workers towards
  external landowning and capitalist elites.
• World systems theory integrates the insights of
  both modernisation and dependency theory. It
  emphasises both the rising importance of foreign
  capital investment and the economic
  stratification of the world into zones of greater
  or lesser dependency.

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Modernisation theory

• Modernisation theory emerged in the early 1960s,
  mostly through the writings of the economist Walt
  Rostow.
• In this period, many countries in Asia and Africa
  were gaining their independence from European
  colonial powers, and their new governing bodies
  were charting their own economic course for the
  first time. It was, in other words, a logical
  time for countries in the developed world to give
  their advice to developing countries on how best
  to proceed towards economic development.
• Rostows advice to the countries of the
  developing world was to allow greater capital
  investment and to move from a localised agrarian
  economic base towards involvement in the
  capitalist world economy.
• Note that Rostows ideas incorporate a distrust
  of the traditional landowning elites of the
  developing world (similar to George), and the
  view that capital is the modern source of
  economic power (similar to Marx).

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Industrial takeoff

• Modernisation theory hypothesises that, if
  developing countries allow foreign direct
  investment and shake off the constraints of
  merely being traditional agricultural societies,
  this will allow their economies the capacity to
  take off into full development.
• At first, developing countries will be dependent
  upon the economic power of the foreign direct
  investors, but Rostow suggests in his work that
  at some point over the course of some decades,
  the economic growth in a developing country may
  become self-sustaining.
• We do have some evidence of Rostows notions
  being correct in the experience of the Asian
  tiger nations, which initially were
  agriculturally-based traditional economies, and
  which have shown remarkable progress towards
  self-sustaining economic growth in recent years.

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Criticisms of modernisation theory

• Modernisation theory is routinely decried for its
  perceived Western bias. Lesser developed
  countries are described in Rostows work as
  backward tradition-bound societies which need
  to be led to economic modernity. The implication
  here is that Western societies are obviously more
  advanced in any relevant aspects. This view
  would later be repudiated by those writing works
  associated with the dependency and world systems
  theories.
• Modernisation theory also presumes there is no
  unequal exchange taking place between capital and
  labour, or surplus value being transferred from
  workers to owners of capitalist firms. Writers
  in the dependency and world systems schools would
  also reject this idea. For these writers,
  foreign direct investment could pose a far more
  significant threat to the economies of developing
  countries, because of a resulting dependence of
  the local populations upon transnational
  corporations.

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Dependency theory

• Dependency theory was principally founded by the
  expatriate German economist and sociologist André
  Gunder Frank in the late 1960s and early 1970s,
  largely in response to the prevalence of the
  modernisation theory over the preceding few
  years. It also found expression in the writings
  of the Argentinian economist Raúl Prebisch.
• The central idea in dependency theory is that
  there is an extraction of surplus value process
  (or something analogous to such a process) which
  makes it possible for foreign firms to extract
  the value of labour done for their firms in a
  country outside to the country of location for
  the firm itself. In other words, there are core
  countries (where the firms are located) and
  periphery countries (where the workers and
  industrial sites are to be found) and profits
  from industrial activities leave the periphery
  countries for the core countries.

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The core and the periphery

• In André Gunder Franks most well-known work, an
  article called The Development of
  Underdevelopment, he argues that industrialised
  societies presume that lesser developed societies
  (if that term is even appropriate) would be
  better off if they adopted their models of
  economic development, but that this may not be
  true. One thing that those societies would
  retain, even if they did not gain the modern
  conveniences of industrialised societies, was
  self-control rather than dependency on the
  countries of the economic core.
• Note that one of the assumptions Gunder Frank
  makes is that the agrarian lifestyle to which
  lesser developed countries are accustomed might
  provide this economic control thats
  essentially the agrarian republican notion that
  control over land gives one economic power.

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Relations of unequal exchange

• Dependency theory highlights relations of unequal
  exchange between core and periphery countries,
  where the core countries clearly benefit at the
  expense of the peripheral countries.
• When foreign investment occurs in a country, the
  profits for the sale of the goods produce largely
  go to the foreign firm. Some of it goes to pay
  domestic wages, but the firms will likely locate
  in the place where they can pay the lowest wages,
  so this factor is more negligible, and in
  general, things would be expected to work out so
  that the maximum part of the domestically-produced
  profit is taken by the foreign investors.
• Furthermore, if any of the products produced by
  the foreign-controlled firm are actually
  purchased domestically, then domestic consumers
  end up sending their money out of the country to
  support the foreign firm.

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Criticisms of dependency theory

• One major problem with dependency theory has been
  its stubborn insistence on disengagement with
  foreign direct investment and foreign-controlled
  markets.
• Buying from foreign-controlled firms means
  profits are largely being taken out of the
  country, so a logical response would be to buy
  locally-produced products. This was,
  essentially, the solution advocated by Raúl
  Prebisch, the solution of import substitution.
  The idea behind this strategy was that whenever a
  product could be produced by a locally-controlled
  firm, this was to be preferred.
• In principle, this was a good idea, but the long
  amount of time required for an industrial take
  off without help from foreign investors has made
  this strategy fairly impractical for most
  developing nations. By contrast, the export-led
  development model, which stresses greater
  integration with the world economy, has been
  associated with rapid development in many
  industrialising countries.

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World systems theory

• The countervailing modernisation and dependency
  theories each had certain conceptual problems
  facing them as general theories of economic
  geography, as well as certain conceptual
  strengths which recommended them as approaches.
  World systems theory owes much of its popularity
  to a desire to integrate the strengths of these
  two approaches.
• The substance of world systems theory was largely
  formulated by the sociologist Immanuel
  Wallerstein, drawing greatly upon earlier work
  done by the historian Fernand Braudel.
• From the modernisation approach, world systems
  theory takes the notion that greater involvement
  in the world economy is part of a move towards
  modernity. The work of both Braudel and
  Wallerstein emphasises how the world has been
  organising itself, since at least the 16th
  Century, into a coherent world economy.

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World systems theory as an outgrowth of
dependency theory

• From the dependency theory approach, world
  systems theory takes the concepts of core and
  periphery, and the concerns about unequal
  exchange between countries based on foreign
  investment and trading relationships.
• In many respects, world systems theory is a
  direct outgrowth of dependency theory, with many
  of the writers in that school making a transition
  into world systems theory scholarship.
• However, unlike more orthodox left-wing
  interpretations of dependency theory, world
  systems theory usually makes an allowance for the
  notion of mobility between the core and the
  periphery. Though they do not doubt that
  exchange relationships are often unequal between
  nations, world systems theorists have identified
  a class of countries in the semi-periphery
  which seem to be moving out of a state of
  dependency (or perhaps into one from an earlier
  state of relative independence).