Rough notes from Dr. Alston's Economics 1740, Economic History of the U.S., Weber State University

Alston introduces the economic growth theory known as the "Staple Theory of Growth." The origins of this theory seem to have originated in a study of the Canadian growth process undertaken by Harold Innis. Innis was interested in being able to explain why different regions in Canada, each with what appeared to be reasonable (albeit different) natural resource endowments, grew at different rates. Innis suggested that one could identify a special theory (although non-general and not applicable easily to every region) that would explain why some regions grew and others did not. His idea centered on the "process of diversification around an export base." The theory has since been expanded and is referred to as the "Export Base" theory of growth.

Basically, Innis felt that regions characterized by favorable man/land ratios (e.g., relatively empty lands such that disgruntled people could move to the empty lands and thus avoid the urban low-wage syndrome), without a pool of cheap labor, and few if any cultural inhibitions that would force the continuation of traditional approaches to production and distribution, could grow if they created essential linkages between the basic export sector and other related sectors of the economy.

Hirschman (1958) later identified the concept of "linkages" as the essential "Strategy of Economic Development."

Backward linkages are those investments in domestic (regional) production that produce the necessary equipment and services used in the export sector. Included here would be such things as machine tool industries, transportation facilities, etc.

Forward linkages are those investments in industries that would turn the raw materials produced in the basic sector (the export sector) into finished goods and services.

Final demand linkages were the creation of wholesale and retail facilities to insure that much of the domestically consumed products would be produced locally.

If a region was characterized by a well-defined and complete set of backward, forward, and final demand linkages, then the region stood a fair chance of growing above the national average. But it would not be enough to simply have a vast supply of natural resources (e.g., minerals, timber, etc.).

The "staple theory of growth" was used (erroneously, it turns out) to explain why the eastern seaboard and Western states grew so rapidly compared to the South. The popular argument (as expressed by Douglas North, among others) was that the South failed to develop anything more than a pure agricultural export economy. Slavery led to low wages among the vast labor force, thus preventing (North argued) the development of final demand linkages. Douglas North imagined that the South became dependent upon the Northwest for its foodstuffs (thus providing a market for the rapidly increasing agricultural output of the West). There was also a tendency for Southern slave owners (claimed Douglas North and others) to import most of their own consumption goods and services. This explanation was a popular one - since it fit with the desire on the part of economic and social historians to explain the advantages of industrial and technological development - but the explanations were generally wrong. Far from languishing, parts of the Southern economy (it now appears, based on the "new economic history" findings of Fogel and others) were actually leading the nation in growth. And that growth was based primarily on the enigmatic institutions of slavery. This debate still rages.

In the meantime, Joseph Schumpeter (an economist concerned about the long run prospects of capitalism and the Marxian contention that capitalism would ultimately destroy itself through cyclical swings and ever increasing concentration of ownership in the hands of a few) recognized that too many of the answers provided by the "staple theory of growth" were relatively short run and cyclical. Once the process got started, he felt, the staple theory of growth was a useful explanation. The whole theory, however, assumes that investment induced in the export sector would be undertaken by business firms and "routiners" who carried out the expansionary phase of the "product life cycle."

Schumpeter did not quarrel with this aspect of the staple theory of growth, but he did direct his attention to how the process got started in the first place. He focused his attention on the role of ENTREPRENEURS, who, he argued, played a vital role in initiating the process in the first place. Entrepreneurs played yet another essential role in the dynamic of capitalism - the creative destruction of past investments in capital. Only by destroying the accumulated capital, Schumpeter argued, could capitalism avoid the long-run predictions of doom offered by Karl Marx.

Schumpeter's earliest work, The Theory of Economic Development (1911, written when he was only 28 years old) brought with it the essential vision of the capitalistic process as one of innovation and invention. Schumpeter argued that "capitalist reality is first and last a process of CHANGE." Although it begins with an essentially static circular flow of economic activity, where everything runs in channels and change is continuous and gradual, it is the industry destroying element of innovation that represents the essential dynamic of capitalism missed in the Marxian theory. Drastic changes (most of which occur in the trough of the normal long-run business cycle (i.e., about every 30 years or so)), brought with them the possibility of new levels of economic activity. The process, he argued was spasmodic and discontinuous. Schumpeter's emphasis was on the autonomous investment created by new ideas, new techniques, new ways of doing things - that is, innovation - as opposed to the induced changes that seem to be emphasized in the "staple theory of growth."

To quote Schumpeter: Economic development is not mere growth. It "consists primarily in employing resources in a different way, in doing new things with them, irrespective of whether those resources increase or not…Development, in our sense, is a distinct phenomenon, entirely foreign to what may be observed in the circular flow or in the tendency toward equilibrium. It is spontaneous and discontinuous change in the channels of the flow, disturbances of equilibrium which forever alters and displaces the equilibrium state previously existing."

Schumpeter identified innovations in the form of new "goods" and new methods of production, as well as the opening up of new markets and the conquest of new sources of raw materials and supplies. He also emphasized new forms of organization in an industry (both in the form of the creation of monopoly trusts and their ultimate destruction).

For Schumpeter, creative entrepreneurs were the prime movers of capitalism, followed by imitators and routiners who were merely responsible for the secondary wave of expansion that followed on the heels of the initial innovation.

Creative destruction was the necessary ingredient of a growing capitalist process. Before his death, however, Schumpeter became concerned that the dynamic element of capitalism had given way to mere "managers" and "absentee owners" who had little or no interest in change and attempted to do everything in their power to avoid creative destruction. In the end, said Schumpeter, maybe Karl Marx was right after all. Not right in his theory, but right about the long-term trend toward socialism. This was because giant research labs would replace the dynamic element of capitalism. These research labs were not designed to destroy property rights and patents, but to protect them. In the long run, dynamic innovation would be, he feared, replaced by "routine" innovation designed to keep power and market shares in the hands of entrenched business firms.

You'll want to compare Alston's discussion of Schumpeter with the treatment  by Walton and Rockoff on pp. 344 and 355 (with respect to his assertion about the timing of railroad development), p. 579 (on long-run outlook for capitalism), p. 644 (on innovation as the true source of economic development), and p. 645 (on his view that monopolies would stifle innovation).

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