Kicking Away the Ladder. Development Strategy in Historical Perspective

This approach, which is concrete and inductive, contrasts strongly with the currently dominant Neoclassical approach based on abstract and deductive methods. This sort of methodology was in fact the staple of the German Historical School, which was the dominant school of economics in many continental European countries before the Second World War, and can be found in works written in English by authors such as Polanyi and Shonfield.[13] The School included among its leading members the likes of Wilhelm Roscher, Bruno Hildebrand, Karl Knies, Adolph Wagner (of Wagner’s Law fame)[14], Gustav Schmoller, Werner Sombart and (contentiously) Max Weber. Weber, these days mistakenly known only as a sociologist, was in fact a professor of economics in the Universities of Freiburg and Heidelberg.[15]

It is today rarely acknowledged that the German Historical School’s influence before the Second World War went well beyond Continental Europe. Yet the school strongly impressed one of the founding fathers of Neoclassical economics, Alfred Marshall, who remarked that its work has ‘done more than almost anything else to broaden our ideas, to increase our knowledge of ourselves, and to help us to understand the central plan, as it were, of the Divine government of the world’.[16]

In the late nineteenth and early twentieth centuries, many leading American economists were directly and indirectly influenced by this School.[17] Although he eventually drifted away from its influence, the patron saint of American Neoclassical economics John Bates Clark, in whose name the most prestigious award for young American economists is given today, went to Germany in 1873 and studied under Roscher and Knies.[18] Richard Ely, one of the leading American economists of the time, also studied under Knies. Ely subsequently influenced the American Institutionalist School through his disciple, John Commons.[19] Ely was one of the founding fathers of the American Economic Association(AEA); to this day, the biggest public lecture at the Association’s annual meeting is given in Ely’s name, although few of the present AEA members would know who he was.

After the Second World War, when the development of post-colonial countries became a major issue, the historical approach was deployed very successfully by many founding fathers of ‘development economics’.[20] The likes of Arthur Lewis, Walt Rostow and Simon Kuznets formulated their theories of the ‘stages’ of economic development on the basis of their extensive knowledge of the history of industrialization in developed countries.[21] Also influential was the ‘late development’ thesis of the Russian-born American economic historian, Alexander Gerschenkron, who, drawing on European experiences of industrialization, argued that the continuously increasing scale of technology would make it necessary for countries embarking on industrialization to deploy more powerful institutional vehicles in order to mobilise industrial financing. Gerschenkron’s work provides an important backdrop to Hirschman’s pioneering work in development economics. Kindleberger’s classic textbook on development economics makes extensive reference to historical experiences of the developed countries, once again with numerous references to Gerschenkron.[22]

In the 1960s, the heyday of development economics, there were even some collections of essays intended explicitly to derive lessons for currently developing countries from the historical experiences of developed countries.[23] As late as 1969, Gustav Ranis, a leading neoclassical development economist (although of an older, gentler vintage), wrote an article entitled ‘Economic Development in Historical Perspective’ for the key mainstream journal American Economic Review.[24]

Unfortunately, during the last couple of decades, even development economics and economic history – two sub-fields of economics for which the historical approach is most relevant – have been dominated by mainstream neoclassical economics, which categorically rejects this’ sort of inductive reasoning. The unfortunate result of this has been that the contemporary discussion on economic development policy-making has been peculiarly ahistorical.