Prior to about 1650 in England, the concept of economic development (increasing per capita incomes) did not exist. People over the past several hundred thousand years hoped to survive and reproduce, but there could have been no thought that they or their progeny would somehow achieve or inherit a more productive lifestyle. The change from hunter-gatherer to slash & burn and later intensive farming took place over dozens of generations so that people were totally unaware of the changes taking place. Furthermore, it can be argued that those changes led to an initial deterioration in the human condition, such that people made those changes reluctantly when forced to do so when populations expanded beyond the support capacity of the previous system (see the Boserup Model to be posted later). In hunter-gatherer societies men do not work; they hunt and fish, which they enjoy as much as I do. In early slash & burn farming societies men will cut the trees but they will not plant or harvest. Gathering fruits and plants, as well as planting and harvesting, was women’s work. Intensive farming requires men to plow and cultivate their farms. Farming promotes the evolution of weeds—mostly annuals that evolve to take advantage of human-made clearings, so that intensive farming requires both men and women to spend much of their time working in their fields. Sedentary lifestyles promotes the animal equivalent of weeds—rats and mice, lice, flees, cockroaches, etc., that evolve to take advantage of permanent human dwellings—that promote the spread of disease. Domestication of animals leads to new diseases that flash from animals to humans. When the natural ecoloby is replaced with pure stands of cultivated crops, pests and diseases will periodically destroy those crops, leaving farmers to starve. The natural ecology almost never fails so that hunter-gatherer peoples rarely face starvation. Those hunter-gatherer societies that still exist know about farming but they are not about to give up the good life and spent their time working unless forced to do so by absence of the hunting/fishing alternative.
The amount of goods on this earth appeared to be strictly limited. One tribe could garner a larger amount of goods only by taking it away from some other tribe; one group or family in a community could improve their position only by appropriating resources from, or enslaving, other groups or families. Feudal societies existed in Europe and Asia for centuries with no perceptible long-term change in the per capita level of living from generation to generation. The share of the population that was relatively well-off—mostly the nobility, military, priesthood, and a small cadre of artisans and tradesmen—was always limited to about ten percent of the total because it was not possible to extract a larger share of the food supply from the majority peasant farmer population through tribute or taxation. Peasant farmers in feudal societies, and people in hunter-gatherer societies, had little incentive to produce more food than they could consume when there was very little of value that could be obtained for that food through trade. In feudal and tribal societies, the vast majority of people had no reason to even consider increasing production above that required to maintain life. The amount of goods on this earth appeared to be strictly limited. One tribe could garner a larger amount of goods only by taking it away from some other tribe; one group or family in a community could improve their position only by appropriating resources from, or enslaving, other groups or families.
The absence of the possibility of increasing per capita production leads to the conclusion that one can consume more only when others consume less. To have more, you must take from people who will necessarily have less. This view, or rather this reality, gave rise to the theory of limited good, that was the prevailing paradigm in feudal and primitive societies. If there is a limited amount of goods in this world it must follow that either all people will be poor, or a small share of the population can have relative wealth by further impoverishing the others.
Shared poverty was typical in tribal societies where resources were generally held in communal tenure and all members of the group were more or less economic equals (although, murder, rape, plunder and enslavement of persons outside the group was the norm in tribal societies). People in tribal societies held most of their productive resources in communal tenure because those resources were not scarce, and there was no motive for personal ownership.
Feudalism evolved when higher population densities gave rise to sedentary farm communities, and productive resources became scarce. The fact that feudalism of Europe and Asia was so similar, in spite of having evolved independently, should tell us that the evolution of that system was mostly independent of culture. Under feudalism a small elite garnered a significant share of total resources for themselves by claiming ownership of all land resources and extracting a tribute or tax, in the form of food or labor, from the majority peasant population that was allowed to procure subsistence using that land. The nobility was able to consume more and higher quality food, clothing, and shelter, but the relative absence of goods, other than the necessities of life, meant that the prime luxury consumed by the nobility was leisure and power over the majority population.
The rural economy in some areas of Andean South America was largely feudal through the mid-20th Century. Landless peasants were forced to engancharse (become hitched or attached) to a hacienda in order to obtain a small plot of land for subsistence production. In exchange, the peasant was required to provide a mandated levy of labor on the owner’s land, and the peasant’s children were often required to work as maids or servants in the big house (personal observation as a Peace Corps Volunteer in the Indian village of Zurite, Peru in 1963 & 1964). Only a small share of the land on most haciendas was used for other than rudimentary grazing, but hacienda owners were eager to obtain control of communal and peasant lands. Litigation by hacienda owners aimed at securing rights to land held by peasant farmers was an expected norm. Hacienda owners rarely wished to make use of the land they were so desperate to control; indeed, they usually made use of only a small share of the land they already owned. When haciendas won control over peasant lands they would generally allow the peasants to continue using the land as before, but on the condition that each family provide two days of labor each week for the hacienda. Indeed, the hacienda labor supply was primarily determined by the number of landless peasants who could be forced to engancharse on the hacienda. Hacienda owners referred to their task of increasing production as hacer los indios trabajar (make the Indians work). Even though haciendas controlled the vast majority of land resources, the total production and monetary incomes of most hacienda owners were very low. Those hacienda owners able to have a vehicle, electricity, indoor plumbing, and modern consumer goods, usually owned a business in the city or were employed as a doctor or engineer. For most hacienda owners, wealth was measured in leisure and power over the Indian population.
Why was it impossible to increase per capita production in feudal societies? The very simple answer is there were very few goods known to exist other than the necessities of life—food, shelter, clothing, horses and other livestock, and a few household items. These items could mostly be obtained by subsistence and household production, but once the family needs were satisfied there would be no reason to continue to work to produce more, unless forced to do so by the requirement to pay tribute or tax to a noble lord. The population in towns or castles produced very little of value to peasant farmers. Peasants would not willingly produce a surplus that would be confiscated by the nobility.
To be sure, some town people did provide goods and services that were of value to peasants and other people. Towns and villages have always been trade centers; even peasant farmers need salt, and a few other items, that could usually be obtained only by trade or barter. Towns also have a blacksmith who makes metal tools and weapons, a wheelwright who made wheels and axels for wagons, and a few other specialists. It is an exaggeration to say the non-peasant population produced nothing of value—but, only a rather small exaggeration. The nobility consumed most of the products and services produced in towns. For the most part, the surplus food and fiber needed by the non-farm population was extracted from the peasants by force. The size of the non-farm population—rarely more than ten percent of the total—was therefore set by the limits of the small legitimate trade and mostly on the ability of the nobility to extract tribute or tax from peasant farmers. In the case of Andean countries in the mid-20th Century, towns produced (or imported and sold) a wide range of goods and services that were of value to peasant farmers—notably beer, rum, cigarettes, soft drinks, bread, a few canned foods, etc., and for better off peasants, clothing, radios, some other factory-made articles. Many peasant farmers were able, and eager, to obtain those things by selling agricultural products in towns; thus, the percentage of the population that could life in towns, or be engaged in other than subsistence production, greatly exceeded ten percent norm in early feudal societies (personal observation).
The Theory of Limited Good helps us understand the cultural, as well as economic, life of pre-industrial peoples of the world. If the supply of economic goods is limited, then the supply of pleasure, beauty, and happiness may also be limited. When one family has too much of those things, they must be taking them away from other people. Your home and possessions should not be too pleasant, nor your daughters too beautiful, nor should you be too happy. Even salvation and eternal life in heaven is made that much more precious by the fact that most people (those who have beliefs that differ from yours) will spend eternity in hell. On the one hand, some persons might see impoverishment of the community as the only way to increase their own level of well-being. On the other hand, other members of a community might want to avoid accumulation of wealth because the resulting impoverishment of other families places community solidarity at risk. The Potlatch ritual, in which a family that has accumulated a conspicuous amount of wealth must divest itself of that wealth by lavish gift giving, was common among many Indian tribes in North America and elsewhere. I witnessed a form of “potlatch” in Peru in the early 1960’s. In this case a family that had accumulated conspicuous wealth would feel obligated to throw a party for the village, providing chicha beer and rum, as well as food, to everyone in the village until the wealth was used up. Some of those parties would continue for two or three days, ending only when the drunken party thrower had spent all his money and all money he could borrow against future earnings.
Persistence of the Theory of Limited Good
Redistribution of accumulated wealth may be necessary to keep the peace in tribal and feudal villages. However, the social stigma against accumulation of wealth can be detrimental to economic development when a society is capable of increasing the level of per capita production. Unfortunately, the Theory of Limited Good continues to be a very powerful myth in modernizing societies, and is often the prevailing paradigm in countries just beginning the development process.
In poor countries around the world, commodities that are for sale in the marketplace generally do not have fixed prices. Buyers and sellers expect to haggle and bargain over the price—a time-consuming and inefficient process that greatly reduces productivity. Unwillingness to accept the concept of a fair and equitable price, in which both the seller and buyer are benefited, flows directly from the theory of limited good. That theory holds that in any transaction there must be a winner and a loser. The seller holds out for a price sufficiently high to assure the buyer will pay more than the item is really worth; at the same time, the buyer bargains hard for a price below the seller’s cost. Both feel the need to best the other in the bargaining contest, well beyond the desire of the seller for a reasonable profit and that of the buyer for a fair price. A seller may be willing to delay, or even forego, a sale to avoid accepting a smaller profit, if that means the buyer feels he got a good deal. Likewise, buyers may postpone purchase for weeks or months in order to obtain a price that will not provide a profit to the seller.
That situation contrasts sharply with countries where economic development has become an expected norm. For the most part, commodities have a set price that provides ample incentive to both producers and consumers to sell and buy—both parties expect to get a fair deal! In rich countries, price bargaining is relatively limited and usually suggests deviousness or dishonesty—would you trust a car salesman? In traditional societies almost all exchange, including buying and selling, wages and rent, and services, will often involve haggling until one or both parties can feel they are walking away a winner. The custom of haggling and bargaining for every potato and taxi ride is one of those cultural traits that is incompatible with economic development. The modern economy depends upon mutual cooperation and reciprocity—trust must be accorded to strangers to a degree that was formerly reserved to members of one’s family.
While living in Peru in the early 1960’s, I would cut the haggling short as follows: Determine in advance what the starting, and final price of the item is likely to be—say a poncho for which the seller will ask 120 soles and ultimately sell for 50 soles when the haggling is over. Initiate your offer at 100 soles (with no fear that the seller will take you up on it). No; the price is 120 soles! Drop your offer to 80 soles. Hey, you just offered 100 soles; I will sell you the poncho for 100 soles. I will give you 60 soles for the poncho. Wait, you just said 80 soles. I will pay 50 soles for the poncho; if you do not accept that price I will drop it to 40 soles. OK, OK, OK, 50 soles! (Some of these damn foreigners won’t play by the rules.) It must be noted that profit may not be the primary purpose of buying and selling on market day. On one occasion I attempted to purchase all the one-day old chickens a young woman had at the price she asked (being desperate for one-day old chickens). No; I will sell you only 3. Why not sell all of them? Because then I would have nothing left to sell! Hey folks, this not a market economy!
In poor countries (and among some groups in rich countries) there is often resentment against successful individuals and enterprises, and a prevailing belief that wealth is a direct result of exploitation of other people. This belief is so strong that many people would prefer to forego economic development if it must entail some persons benefiting more than others, or conspicuous wealth amid mass poverty. It is important to be clear on this point: Thus far in the history of economic development, some people have always benefited more than others, and in the early stages it has produced conspicuous wealth amid mass poverty. If there is another way to do it, someone should point that out (and provide some historical examples).
That view is often taught in universities in poor countries, and incredibly, sometimes taught in technologically advanced countries. In poor countries it is often a mainstream or establishment viewpoint that is widely shared among the population. In technologically advanced countries that viewpoint has been defined as non-establishment alternative or dependency theory view. I have often wondered whether those ‘social scientists’ who present this view do it simply as a liberal protest statement or to gain the good-will of a certain class of students, or whether they actually subscribe to the theory. I also find it ironic that some students from poor countries travel to the U.S. to study the theory of limited good view of development, when that view is often held to be common knowledge in their own countries, but rejected by most scholars in the U.S.
But, objection to accumulation of wealth is not just pandering to persons who oppose the social and economic establishment. Even among people who should know better, there is a nagging feeling that Bill Gates’ billions may be the reason hundreds of thousands of people live in poverty. Likewise, the large and successful businesses such as McDonalds and Wall Mart must be guilty of something—else they would not be so rich and successful. Economic development—an increase in the per capita production and consumption of goods and services—is, for most of us, a mysterious process. How does new wealth come into existence? Where does it come from? How can it be true that we will all be better off if we rush out and spend our money on the silliness that Madison Avenue is pushing in TV commercials? How can inadequate demand cause recession and poverty? Don’t recession and poverty prove that demand is already too high in comparison to the supply of goods and services? Doesn’t it make more sense to believe recession and poverty are caused by low productivity? And, doesn’t it make more sense to believe that if Bill Gates didn’t have so many billions of dollars, there would be more for the rest of us?
When John Maynard Keynes expounded his Demand Theory of economic growth, most people, including some economists, were puzzled. How could we cure the problem of low consumption in the private sector by having the government consume more? Wouldn’t that just reduce the amount left over for private consumption? How could government purchase and destruction (or permanent storage) of large amounts of food cause people to have more food?
Clearly, the Demand Theory of economic growth did work. The U.S. Government’s New Deal programs aimed at stimulating demand during the 1930’s were probably too modest to have pulled the country out of the World Depression. However, government stimulus of the economy did reduce unemployment and reverse the skid toward economic collapse. Later, the enormous demand created by WW II did cause the world depression to end and sparked a rapid increase in per capita incomes around the world. But, “What about the long run?” demanded many economists and others. Keynes answered: “In the long run we will all be dead.” Keynes’ response was not just sarcasm; indeed, economists, like the rest of us, continue having a tough time answering that question.
Several years ago I spoke at the Ministry of Agriculture in Quito, Ecuador, on the subject of agricultural development. During the question and answer period, one agricultural expert suggested: “We (Ecuadorians) would have plenty of bananas to eat if we didn’t export most of our crop to the United States.” I responded: “If Ecuador stopped the export of bananas there would just be more people in Ecuador who would be unable to afford to consume bananas;” (and that what Ecuador needed to do was find new export markets for their almost inexhaustible ability to produce bananas, and that the only new potential market not already saturated with bananas was Eastern Europe). They all knew their colleague was wrong and I was right; the problem of the banana economy in Ecuador was the constant tendency to overproduce for a market already saturated with bananas. Indeed, the people of the Guayas Basin, where most bananas are produced, were lobbying the Ministry of Agriculture to prohibit banana production for export in the Esmeraldas valley, where there was growing interest in that enterprise. Everyone knew the problem was insufficient demand. But, they keep asking themselves: How can this be possible?
It should also be obvious that Ecuador will never grow rich by selling bananas, regardless of the size of the market. It is a simple fact that as world incomes go up, the share spent on bananas will go down, and people selling bananas will earn an ever decreasing share of the aggregate world income [see my statement on Engel’s Law in “Why Doesn’t Great Wealth Produce Great Happiness].
How can it be true that exporting even more bananas will cause the amount of bananas consumed locally to increase? Exactly the same way exporting more cars from the U.S. will cause more people in the U.S. to be able to afford to purchase cars! Ecuadorians could easily double their production of bananas if they had a market; likewise, U.S. automakers would love to double the production of cars if someone would buy them. How can it be true that foreign investment will promote economic development in a poor country when the investors will take more money out of the country than they bring in? Exactly the same way investment in our community by a firm from Chicago will produce jobs and higher incomes for us, in spite of the fact that a Chicago investor will, unless the investment is a total failure, certainly take more money out of our community than was invested in that enterprise. The view that investment will have a negative effect on development, because the amount of money taken out of the business in interest and profit will exceed the amount of invested, flies in the face of logic and common sense. What sort of fool would invest 10 million dollars in Ecuador and wind up 20 years later with less than 10 million? Would you put 500 dollars in the bank and be satisfied with getting 400 dollars back 20 years later? If you received your $500 plus another $1,100 in interest payment (at 6% annually) would you be exploiting the bank? According to the theory of limited good, the answer is YES! Surely, no one could believe that theory holds in the modern economy. Oh, but they do (or at least say they do); and they teach that theory in university classrooms around the world, including a few classrooms here in the United States!
A ten million dollar investment in the U.S. would probably generate a return in interest and profit for an investor of at least $16 million dollars every 10 years (a return on investment of 10%). (After all, the investor could get $8 million from a bank at 6% interest with no risk at all!) That same investment made in the more risky economic environment of Ecuador would need to produce at least $50 million in interest and profit every 10 years (a 20% return) because the investor would assume the added risk only if higher returns were expected. That investment would also produce a gross income of $250 million dollars or more over that period, of which all but interest and profit would go for rent, raw materials, and labor. How can someone argue that the people of our community, or the people of Ecuador, would be better off without the $250 million dollars in economic activity, because the business owner removed $16 or $50 million in interest and profit on the investment? But, people do make those arguments—incredibly, you can hear those arguments in university classrooms here in the United States!
The Demand Theory of Productivity
In technologically advanced countries we know (or think we know) recession is caused by faltering demand. When demand falters we attempt to stimulate it by reducing taxes and increasing the money supply (reducing interest rates), and by increasing government spending. Likewise, when the economy is overheated it would be appropriate to increase taxes and the interest rate, and reduce government spending.
Tax increases and reductions in government spending are politically unpopular, so politicians are hesitant to use these tools. Politicians probably would not raise interest rates to prevent inflation either, for the same reasons. Fortunately, in the U.S. interest rates are set by Federal Reserve (the FED), which is mostly independent of the White House and Congress. In many less developed countries political leaders do control the interest rate so that it is virtually impossible to stop inflationary pressure, given that politicians will usually prefer to destroy the economy rather than their own political career!
When Ronald Reagan brought in very unorthodox supply side economists, his own Vice President (Bush Senior) referred to it as voodoo economics. In practice, the Reagan administration did reduce taxes and did increase government spending (mostly on military hardware), and the economy did recover.
Is low productivity in poor countries also caused by problems on the demand side? Or, is low productivity in Kenya, Peru, and Pakistan caused by the inability of farms and factories to increase production? Most development projects appear to accept the second position; that is, they focus on increasing production. It is assumed, that farms, factories, and other businesses in poor countries are unable to produce enough food, manufactured goods, and services to meet the demand. It is assumed, apparently, that low levels of consumption prove demand exceeds the supply of goods and services. Is that true? Or, are low levels of consumption the result of low demand in the marketplace—that is, a result of the fact that a large share of the population does not have money to spend on those goods and services they would like to purchase?
Over the past 40 years that I have interviewed a very large number of farmers in various countries of Latin America. One question at the top of my list is why the farmer does not increase production: Why not clear a bit more land and plant an additional quarter-hectare of corn? Why not apply a bit more fertilizer to that field so you can use it every year, instead of leaving it fallow every other year? Why not plant alfalfa in that field rather than making use of it for natural pasture? I have never met one farmer who responded that he did not know how, or was not able, to increase production. Rather, they have all responded: There is no market for the additional production; or, there is no way to get the additional production to the market; or, the owner of the truck going to the market town will charge me more than I will get for the product; or, most commonly, the government has set the market price below my production cost. Most factories in poor countries operate far below capacity, and would be more than happy to increase production. The capital goods used in factories are mostly produced in technologically advanced countries where the size of the market is very large. Because most poor countries have much smaller markets (lower incomes and often smaller populations) many machines in factories operate well below capacity. Even in those cases in which a factory is operating at capacity, owners would love to expand their operations with new buildings, capital goods, and workers, if they had a market for the products. They do not increase production because there is no market demand for the products they are willing and able to produce.
I have never met a shoe-shine boy who was unable or unwilling to shine more shoes; never met a street vendor who was unable or unwilling to sell more goods; never met a taxi driver who was unable or unwilling to haul more passengers; and so on for every sector in the economies of Latin American countries. The problem is not inability to produce; rather, the problem is the absence of someone to buy the product. How can development be promoted by policies that aim at doing what people are already willing and able to do—increase production—rather than doing what people cannot do—increase real demand?
Hungry people with no money do not create demand for food. Likewise, people with no money do not stimulate demand for the goods and services produced in the non-farm sector. Hungry people with no money is NOT a food problem; that is a money problem. Likewise, when people with no money lack housing, clothing, and most other goods and services, the problem is NOT scarcity of housing, clothing, etc. Increasing the supply of food and other goods and services will not cause people with no money to purchase those commodities. Lack of money is caused by low salaries and wages, unemployment and under-employment, or by disability resulting from age or physical/mental conditions. Those problems can only be solved by increasing salaries and wages, providing employment for able-bodied persons and providing charity for those who cannot work because they are destitute children, elderly, or physically or mentally disabled.
Over the longer term, and especially in the later stages of development, increasing salaries and wages will depend upon increasing productivity with improved technology and labor-saving capital. In addition, improved technology may result in lower cost production and thus lower prices that can have a stimulating effect on demand. But, the first step toward increasing demand is being sure all able-bodied persons have access to employment. Modern technology is mostly labor-saving, and will tend to reduce the number of jobs in traditional sectors. Often the capital goods available to poor countries are already overly focused on labor-saving technology. Until poor countries are able to fully employ those people who want jobs, labor-saving technology is not likely to be appropriate technology.
We must also remember that there is no demand for a commodity until the existence of that commodity becomes known to potential consumers. In rich countries, advertising is an essential ingredient in stimulating demand; advertising causes people to want things that they would otherwise have been content to live without. In poor countries, the demonstration effect (becoming aware of a desirable item by seeing it used by another person) as well as advertising plays that role. It does not matter (for economic growth) whether the things people are convinced to want are actually worthwhile (in the judgment of outside observers). It only matters that people want them enough to increase their production sufficiently to get money to pay for them.
It is often suggested that sale of goods and services that are judged to be of trivial value should be curtailed, so that consumers would spend their money on goods and services that are ‘worthwhile.’ This view is very questionable. Unless the consumer who spends money on things judged to be of trivial value can be induced to start “wanting” those goods judged to be ‘useful’ (even though their actions suggest otherwise) total market demand will tend to decrease in direct proportion to curtailed demand for “trivial” items, causing the economy to shrink. (Restrictions on the consumption of harmful and addictive substances and services are justifiable for health and safety, rather than economic reasons.)
The Origin of Economic Development
Beginning about 1650 something very strange began to happen in England. People in towns began to manufacture goods that peasant farmers found desirable, and cheap enough to purchase. These goods, mostly textiles, were cheap because more efficient spinning and weaving machines were invented and water power and later steam power (by burning coal) was substituted for labor. It turned out that when urban people produced things peasant farmers wanted, the farmers were more than willing to increase production of food and transport that surplus to the market for sale.
The limits on urban growth were broken. Indeed, there seemed no limit on the number of people who could make a better living producing manufactured goods. And, there seemed to no limit on the amount of surplus food the farm population could produce, in spite of the fact that urbanization was reducing the share (and sometimes the absolute number) of the population in the farm sector. As the share of the population in the farm sector declined, the primary market for goods and services produced by urban people became the urban people themselves. People cannot grow rich by producing and exchanging agricultural products. Engel’s Law tells us that if incomes increase the share of total income spent on farm products will decline. But, people can grow rich by producing and exchanging manufactured goods because the demand for those products appears to be inexhaustible. As development continues, the production of services—that is, goods that are intangible—became the major component of increased demand and production.
It is even more difficult for us to understand how it is possible for people to grow rich by producing and exchanging services—or as some would say, doing each other’s laundry. We continue to believe there must be some outside source of new wealth coming into the system. Accordingly, economic geographers classify production as ‘basic’ versus ‘non-basic’ goods and services, where basic goods are those sold outside the community (or city, or state, or country). It is presumed that economic growth is dependent upon production of basic goods—you must bring new wealth into the community if it is to develop economically. However, studies have shown that the share of all goods that are basic (sold outside the community) is mostly a function of the size of that community. A single farm or factory exports almost all of the goods produced; a town exports most of the goods and services produced; a very large city exports an smaller fraction of production; the State of Ohio exports proportionally less; large countries only a few percent of total GDP to other countries; and the world as a whole exports nothing at all. If it were true that development is dependent upon bringing wealth in from somewhere else, how could it be possible for the entire world to experience economic development?
Even though we know the basic/non-basic concept of development is flawed, we continue to cling to the notion that wealth must be generated from outside the system. The city fathers are willing to encourage and subsidize industries that produce products (especially tangible goods), that will be sold outside the city, because that brings money into the city. They are much less enthusiastic in their support of a bowling alley or a restaurant—and other industries that just move money around inside the city—because it is presumed that those industries do not promote economic growth. Oh, but they do! Indeed we have no evidence that production of intangible services to be consumed within the city contributes less to economic growth, dollar for dollar, than production of tangible goods, or goods to be sold elsewhere.
Obviously, some industries have greater spread effect by producing backward and forward linkages to other sectors of the economy. A car factory may encourage lateral developments in other related industries that produce raw materials, and stimulate transport and wholesale activities that are needed to move the finished product to customers. In this sense, the car factory does promote more economic development per dollar of production than does a bowling alley.
The theory of limited good is a logical and rational viewpoint that seems to hold in much of human experience. If there is one teaching position available in the Geography Department and Jane gets that job, then John and Martha will not get the job. If the salary increase pool for the department is a fixed amount of dollars (as it often is), then every dollar Tom gets is a dollar less for Bob and Charles (which explains why they fight like cats and dogs over the salary increase pool). If Joe gets the prettiest girl in the class, then Don and Mike certainly won’t. If Paul purchases the lot with the best view in the development, then Dorothy and Jim will have to make do with something less. And, in a society where economic development is absent—where the per capita income remains constant—one family can have a higher income only when one or more other families have a lower income. It is not easy to explain how and why the theory of limited good does not hold in societies that are experiencing economic development (experiencing income growth on a per capita basis). But, it is easy to explain why economic development is not possible as long as people behave as if the theory of limited good is at work in their community.