Critical minimum effort theory
Encyclopedia
The critical minimum effort theory has been given by Harvey Leibenstein
, in his book Economic Backwardness and Economic Growth. This theory relates to overpopulated and underdeveloped or developing nations such as India
and Indonesia
.This theory is based on Malthusian theory of population.
This theory is one of the balanced growth theories
. In this theory Leibenstein essentially talks about how large doses of investments in an economy can help the economy in development.
Also there are three other important points apart from the assumptions, which are of prime imporatnce to Harvey Leibenstein's theory:
.
Harvey Leibenstein's thesis is based on the following propositions:
Nelson (1 956) and Leibenstein (1957) proposed that when population will increase per capita income will also increase along with it, and thus the per capita income of the economy rises above the minimum subsistence level. Both, Nelson and Leibenstein said that even though the income rises initially, there is an upper limit to it, which is about 3-4% per annum, after this point a rise in the per capita income will not be accompanied by a rise in the rate of growth of population, instead it may also decrease after a certain point (this is because at high income levels people want to keep their family size small so that they can maintain high standards if living.)
Nelson and Leibenstein have sressed on the importance of Social structure
, Human capital
, and Entrepreneurship
, but they say that the development of these and investment in these sectors alone can not attain critical minimum effort.
In the graph, it can be seen that with rise in population, the per capita income decreases. So as there is population growth the per capita income of the economy will decrease. The line drawn parallel to the X axis is the zero poulation growth line. When the per capita income is above this zero growth line then population growth will be positive, below it it will be negative.
This shows that the increased per capita income leads to an increase in the population growth rate and eventually the economy is brought back to the old level of low level equilibrium.
Thus population acts as an income depressing factor.
In this figure, the initial equilibrium point is where the blue line intersects the horizontal line parallel to the X axis. Now if there is any displacement in the system in the form of lets say investments then the system will be brought back to this equilibrium point.
The zero investment point is above the zero population point due to time lag. The population needs some time to increase.
If it would have been the other way then the economy would never be able to come out of the trap.
So it is necessary that the initial investment levels are sufficiently above a minimum magnitude.
So it is not necessary that all efforts to raise the per capita income are successful, some are just too small or below the minimum required level. Now since this type of investment sometimes becomes difficult for underdeveloped nations, Leibenstein stresses on the fact that the investment can be spread over a period of time and does not necessarily have to be made instantaneously.
The main idea of the theory is that the vicious circle needs to be broken and the per capita income should increase.
Harvey Leibenstein bases his theory on the following four main hypotheses:
1. A backward economy is an equilibrium system whose equilibrium state possesses a degree of quasi stability with respect to per capita income.
2. If the equilibrium of a backward economy is disturbed, forces that tend to raise per capita incomes set in motion, directly or indirectly, forces that have an effect of depressing per capita income.
3. In the disequilibrium state in the backward economy for at least the lower incomes above the equilibrium level, the effects of the income depressing forces are greater than the effects of the income raising forces.
4. During any period there is some absolute maximum to the effects of the income depressing forces, but the absolute maximum (if there is one) of the effects of per capita creating forces is greater than that.
From the above hypotheses we can conclude that "in order to achieve the transition from the state of backwardness to the more developed state it is required (a necessary but not sufficient condition), the economy should receive a certain stimulus to growth and which should be greater than a certain critical minimum size."
He defines Stimulant
as any event that changes the value of a variable away from its equilibrium value so that due to this event there is an initial increase in the per capita income.
Shock
on the other hand has been defined by Leibenstein as any event external to the system due to which per capita income is reduced initially.
Now in underdeveloped economies shocks are more powerful than stimulants so what should be done in such a scenario is that the levels of incomes should be risen to such an extent that stimulants become stronger than shocks and the growth in incomes becomes self sustaining.
(i) a strong profit incentive
(ii) willingness to accept entrepreneurial risk
(iii) an eagerness to promote technical and scientific progress.
If a country wants to achieve balanced growth, then critical minimum effort is almost a pre-condition.
Critical minimum effort theory as opposed to big push theory does not stress on the fact that a lump some amount of investment has to be made instantaneously. So it is more relevant for under developed nations.
rate. Instead population depends upon a number of economic and non economic factors.
But still Critical minimum effort theory is a very important balanced growth theory.
Harvey Leibenstein
Harvey Leibenstein was a Ukrainian born American economist. One of his most important contributions to economics was the concept of X-efficiency....
, in his book Economic Backwardness and Economic Growth. This theory relates to overpopulated and underdeveloped or developing nations such as India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
and Indonesia
Indonesia
Indonesia , officially the Republic of Indonesia , is a country in Southeast Asia and Oceania. Indonesia is an archipelago comprising approximately 13,000 islands. It has 33 provinces with over 238 million people, and is the world's fourth most populous country. Indonesia is a republic, with an...
.This theory is based on Malthusian theory of population.
This theory is one of the balanced growth theories
Ragnar Nurkse's balanced growth theory
The balanced growth theory is an economic theory pioneered by the economist Ragnar Nurkse . The theory hypothesises that the government of any underdeveloped country needs to make large investments in a number of industries simultaneously...
. In this theory Leibenstein essentially talks about how large doses of investments in an economy can help the economy in development.
Assumptions
There are two points which are assumed to be true in this theory:- The output is subject to diminishing returns with respect to population growth.
- Population Growth is a function of per capita income and Rate of Investment is a function of per capita income.
Also there are three other important points apart from the assumptions, which are of prime imporatnce to Harvey Leibenstein's theory:
- For every disturbance, no matter how large it is, the long run population growth effects will be more significant than the effects of induced investment.
- The system is quasi-stable for small displacement but not large ones.
- Equilibrium is unstable to begin with.
The Thesis
The critical minimum effort theory is more or less an extension of the Harrod-Domar modelHarrod-Domar model
The Harrod–Domar model is used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed independently by Sir Roy F. Harrod in...
.
Harvey Leibenstein's thesis is based on the following propositions:
Nelson (1 956) and Leibenstein (1957) proposed that when population will increase per capita income will also increase along with it, and thus the per capita income of the economy rises above the minimum subsistence level. Both, Nelson and Leibenstein said that even though the income rises initially, there is an upper limit to it, which is about 3-4% per annum, after this point a rise in the per capita income will not be accompanied by a rise in the rate of growth of population, instead it may also decrease after a certain point (this is because at high income levels people want to keep their family size small so that they can maintain high standards if living.)
Nelson and Leibenstein have sressed on the importance of Social structure
Social structure
Social structure is a term used in the social sciences to refer to patterned social arrangements in society that are both emergent from and determinant of the actions of the individuals. The usage of the term "social structure" has changed over time and may reflect the various levels of analysis...
, Human capital
Human capital
Human capitalis the stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. It is the attributes gained by a worker through education and experience...
, and Entrepreneurship
Entrepreneurship
Entrepreneurship is the act of being an entrepreneur, which can be defined as "one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods". This may result in new organizations or may be part of revitalizing mature organizations in response...
, but they say that the development of these and investment in these sectors alone can not attain critical minimum effort.
In the graph, it can be seen that with rise in population, the per capita income decreases. So as there is population growth the per capita income of the economy will decrease. The line drawn parallel to the X axis is the zero poulation growth line. When the per capita income is above this zero growth line then population growth will be positive, below it it will be negative.
This shows that the increased per capita income leads to an increase in the population growth rate and eventually the economy is brought back to the old level of low level equilibrium.
Thus population acts as an income depressing factor.
In this figure, the initial equilibrium point is where the blue line intersects the horizontal line parallel to the X axis. Now if there is any displacement in the system in the form of lets say investments then the system will be brought back to this equilibrium point.
The zero investment point is above the zero population point due to time lag. The population needs some time to increase.
If it would have been the other way then the economy would never be able to come out of the trap.
Explanation
Critical minimum effort theory is one of the balanced growth theories. It talks about how a minimum amount of push is required by an economy for it to be set on the path of development. This push can be in the form of investments. The "minimum" amount of effort that is required is "critical" for the economy to move towards development hence this theory is called critical minimum effort.. Because of the high population in underdeveloped countries the capital accumulation and labour supply are not sufficient to increase the per capita income.So it is necessary that the initial investment levels are sufficiently above a minimum magnitude.
So it is not necessary that all efforts to raise the per capita income are successful, some are just too small or below the minimum required level. Now since this type of investment sometimes becomes difficult for underdeveloped nations, Leibenstein stresses on the fact that the investment can be spread over a period of time and does not necessarily have to be made instantaneously.
The main idea of the theory is that the vicious circle needs to be broken and the per capita income should increase.
Harvey Leibenstein bases his theory on the following four main hypotheses:
1. A backward economy is an equilibrium system whose equilibrium state possesses a degree of quasi stability with respect to per capita income.
2. If the equilibrium of a backward economy is disturbed, forces that tend to raise per capita incomes set in motion, directly or indirectly, forces that have an effect of depressing per capita income.
3. In the disequilibrium state in the backward economy for at least the lower incomes above the equilibrium level, the effects of the income depressing forces are greater than the effects of the income raising forces.
4. During any period there is some absolute maximum to the effects of the income depressing forces, but the absolute maximum (if there is one) of the effects of per capita creating forces is greater than that.
From the above hypotheses we can conclude that "in order to achieve the transition from the state of backwardness to the more developed state it is required (a necessary but not sufficient condition), the economy should receive a certain stimulus to growth and which should be greater than a certain critical minimum size."
Stimulants And Shocks
Leibenstein has used these 2 terms stimulants and shocks in his theory quite often.He defines Stimulant
Stimulant
Stimulants are psychoactive drugs which induce temporary improvements in either mental or physical function or both. Examples of these kinds of effects may include enhanced alertness, wakefulness, and locomotion, among others...
as any event that changes the value of a variable away from its equilibrium value so that due to this event there is an initial increase in the per capita income.
Shock
Shock
Circulatory shock, commonly known simply as shock, is a life-threatening medical condition that occurs due to inadequate substrate for aerobic cellular respiration...
on the other hand has been defined by Leibenstein as any event external to the system due to which per capita income is reduced initially.
Now in underdeveloped economies shocks are more powerful than stimulants so what should be done in such a scenario is that the levels of incomes should be risen to such an extent that stimulants become stronger than shocks and the growth in incomes becomes self sustaining.
Factors Determining The Need For A Minimum Effort
Leibenstein in his theory discusses the factors that determine the need for the minimum effort required by the developing economies:- Internal Diseconomies: Because of presence of indivisibilities in the factors of production it is necessary for the economy to have investments of a certain minimum size.
- External Economies Interdependecies and Balanced Growth: In a closed economy, industries are interdependent on one another. So industry 1 will require materials from industry 2, and so on. Therefore for one to exist the other must also exist. So this shows that the minimum investment required for all these industries to exist should be of considerable amount. This leads to a notion of balanced growth. Leibenstein says that if there were no technological indivisibilities then balanced growth could be easily achieved with any level of investment. But due to presence of indivisibilities balanced growth requires a substantial minimum amount of investment.
- Overcoming Induced and Autonomous Depressants: The developing or underdeveloped economies have both autonomous and induced factors depressants.To overcome these factoes investments above a certain minimum size is required.
- Non-Economic Aspects and Growth Momenetum: The underdeveloped countries have old and traditional attitudes and mindset, which has to be changed as these inhibit growth. Economic growth requires the promotion of the following type of attitudes:
(i) a strong profit incentive
(ii) willingness to accept entrepreneurial risk
(iii) an eagerness to promote technical and scientific progress.
If a country wants to achieve balanced growth, then critical minimum effort is almost a pre-condition.
Critical Evaluation
- The theory critical minimum effort is better than big push theory in the sense that it is more practical than the latter as critical minimum effort theory can be better timed and can be broken up into a series of smaller efforts.
Critical minimum effort theory as opposed to big push theory does not stress on the fact that a lump some amount of investment has to be made instantaneously. So it is more relevant for under developed nations.
- The theory is also consistent with the concept of decentralised democratic planning as practiced in India.
- It is wrongly said in the theory that increase in per capita income would lead to a decrease in population size due to a low birth
rate. Instead population depends upon a number of economic and non economic factors.
- Critical minimum effort theory completely ignores the monetary and fiscal policies which are important factors in deciding the investment and income levels of an economy.
- It is true only for a closed economy. It does not take into consideration international trade, foreign capital, etc.
But still Critical minimum effort theory is a very important balanced growth theory.
See also
- Development economicsDevelopment economicsDevelopment Economics is a branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example,...
- Big Push ModelBig Push ModelThe big push model is a concept in development economics or welfare economics that emphasizes the fact that a firm's decision whether to industrialize or not depends on its expectation of what other firms will do...
- Rostow's stages of growth
- Strategy of unbalanced growthStrategy of unbalanced growthUnbalanced growth is a natural path of development. Undeveloped countries start from a position that reflects their predecessor's previous investment decisions and development. Accordingly at any point of time they are highly desirable investment programs which are not in themselves balanced...
- Low level equilibrium trap
- Harvey LeibensteinHarvey LeibensteinHarvey Leibenstein was a Ukrainian born American economist. One of his most important contributions to economics was the concept of X-efficiency....
- Thomas Robert Malthus