The sociology of development as a field of study, a structure of knowledge, providing an interpretive grid through which to render impoverished regions of the world intelligible has its roots after the completion of Second World War with the crystallization of ‘Modernization theory’, which constituted an ideation that societies are understood to move from social positions of tradition to modernity polar ends of an evolutionary continuum. At some point, incremental changes give way to a qualitative jump into modernity, marked by the essence of industrialism. In this sense, the Third world is perceived to be below the threshold of modernity, with a preponderance of traditional-like features such as an extended kinship social structure and, due to the lack of progress towards political differentiations, similar to that of Western forms of democratization, strict hierarchical sources of authority, altogether negating the possibilities to move beyond disintegrated autarkic primary economic activities (Parsons, 1964).
The development of a high extent of differentiation: the development of free resources which are not committed to any fixed, ascriptive groups; the development of wide non-traditional, “national,” or even super-national group identifications; and the concomitant development, in all major institutional spheres, of specialized roles and of special wider regulative or allocative mechanisms and organization, such as market mechanisms in economic life, voting and party activities in politics, and diverse bureaucratic organizations and mechanisms in most institutional spheres (Eisenstadt (1973: 23).
According to Rostow (1960), all societies can be placed along a linear continuum from undeveloped to developed along a ‘stages of economic growth’ path, derived from an extensive study of Western economic development. In ‘traditional society’, the first stage, it is deemed that economic output is limited because of inaccessibility to innovative technology. At the second stage, ‘the preconditions for take-off, modern science, attributed to “Western Europe of the late seventeenth and early eighteenth centuries” (Rostow, 1960, p. 6) ensues new innovations in production in agriculture and industry, fostering widespread education, entrepreneurship, and institutions capable of mobilizing industrial capital; capitalistic investments increase, especially in transport, communication and raw materials. Nevertheless, despite the development of some modern manufacturing, traditional social structures and production techniques remain:
In many cases, for example, the traditional society persisted side by side with modern economic activities, conducted for limited economic purposes by a colonial or quasi-colonial power (Rostow, 1960, p.7)
Rostow’s third stage is ‘the Take-off’, in which traditional barriers to economic growth, like the effect of a dual economy, are overcome. At this point, capital investment increases rapidly and new industries expand exponentially, as does an ‘entrepreneurial class’-economic growth becomes a normal condition” (Rostow, 1960, p. 36). At the fourth stage, ‘the Drive to Maturity’, technology becomes more complex and what produced is now less a matter of economic necessity, and more a question of consumer choice. This leads to the final fifth stage of high consumption, in which economic sectors specialize in the manufacturing of highly sought after consumer durables and basic life needs are mutually satisfied. In a play on Marx, Rostow’s analysis suggests that the West, which “is more developed industrially only shows, to the less developed, the image of its own future’ (Marx, 1954, p. 19). The assumption is that capitalism is a historically progressive system, which is transmitted from the privileged economically advanced countries to the rest of the world by a continual process of destruction and replacement of pre-capitalist social structures (Palma, 1978).
The problem with modernization theory is that it is quite ahistorical, with respect to the global capitalist exploitation. ‘Modernization’ theory can, and has been, be interpreted as a ‘blame the victim’ approach to problems affecting the ‘Third World’. Rostow ignores the external influences like colonialism that contributed to social in the Third World. Rostow’s, and for most of ‘modernization’ theory, the unit of analysis is the nation-state of the ‘Third World’, emphasizing internal dynamics, sectors and sub-sectors, combined with the causal role of technology. As such, conclusions drawn from this approach are that all nations, regardless of the history of imperialism, colonialism, etc., should be able to modernize with emulation of more developed economies and their diffusing of highly advanced technology.
Paul Baran and Paul Sweezy, in Monopoly Capital (1960), building on the path-breaking work of Michel Kalecki and Joseph Steindl, assess the degree to which monopoly, as measured by the market concentration ratio of large capitalist firms (corporations) in economically advanced countries, ensues an inverse of Marx’s famous hypothesis that the ‘laws of motion’ of capitalist development in produces a ‘tendency for the surplus to fall. Rather, the economic surplus, defined as the gap, at any given level of economic activity-effective demand in Keynesian terminology-, between what is produced and the socially necessary costs of producing it, under monopoly capitalism has a tendency to rise (Baran & Sweezy,1966, pp. 9, 52-57).
Since aggregate levels of effective demand for total output determine the level of economic activity, crises of capital accumulation are inevitable if the monopoly sector cannot sustain its power via sufficient investment opportunities to absorb its accumulating share of the total surplus produced. Rather than let this insufficiency put downward pressures on potential profits as a whole, various stabilizing factors are set in motion, which include classical Keynesian government deficit spending, research & development (although risky without reliable forecasts potential spillover effects), waste (as evidenced by a sales effort, i.e. consumerism), or imperialism-the last of which provides the foundations for the dependency theoretical approach to economic development.
In this sense, for an understanding of the fundamental division between economically advanced countries and impoverished ones, it is requisite to place attention to the extent to which foreign investment acts as an outlet for investment-seeking surplus generation. Unlike Lenin’s theory of imperialism, foreign investment is a method of extracting wealth, not a channel through which surplus is directed, ensuing underdevelopment (Baran & Sweezy, pp. 104-105). Underdevelopment is a thus process by which monopoly capital in economically advanced nations exploit economically weaker countries by exporting capital to the extent that profits produced (from the production of cheaper consumer goods or raw materials via lower wages in these countries, for example) are repatriated. It is the process by which the expropriation of “foreign sources of supply and foreign markets, ena[ble] [the agents of] monopoly capital to buy and sell on specially privileged terms” (Baran & Sweezy 1966, p. 201), ensuring, caeteris paribus, their positions of power in the world are sustained. The result is that economically weaker countries suffer the retardation of the requisite forces to spawn autonomous and dynamic process of self-governance of the conditions that constitute independent social/political/economic coordination, planning and control.
The argument is that (Baran & Sweezy, pp. 9,178-179) monopoly capitalism is tantamount to the degree to which large capitalist firms in economically advanced countries have as their counterpart the “exploitation of much of the rest of the world” and, as a result, constitute international relations as a “hierarchical system with one or more leading metropolises, completely dependent colonies [even if not name, certainly in practice] at the bottom, and many degrees of superordinate and subordination in between […] [t]hese features are of crucial importance to the functioning of both the system as a whole and its individual components […] (Baran & Sweezy, 1966, pp. 178-179). As such, “we cannot hope to formulate adequate development theory and policy for the majority of the world’s population who suffer from [impoverishment] without first learning how their past economic and social history gave rise to their present underdevelopment” (Frank,  1969). Underdevelopment is neither an original nor traditional social position. Hence, it cannot be assumed that the contemporary position of the Third World can be understood as solely a reflection of its internal historically specific social, political, economic, and organizational characteristics. The process by which monopoly capital in economic advanced countries extract surplus from less-developed countries through capital exports limits the latter’s ability to achieve the status of the former. Thus, ‘modernization theory’ is utterly unsatisfactory, for such an approach
[…] in all its variations, ignores the historical and structural reality of the underdeveloped countries. This reality is the product of the very same historical process and systemic structure as is the development of the now developed countries’ (Frank 1969, p. 47).
To suggest that social, political, and economic advancement of the underdeveloped world can be generated by the diffusion of what is deemed modernizing institutions, values, etc. is fundamentally erroneous. If development fails to occur, it is not because within the Third World there are mere obstacles to diffusion because of innate poverty arising from some form Gerschenkronian ‘backwardness’, but due to the net outflow of vital resources, whether natural, monetary, human, technological etc. The implication is that underdevelopment is not because of the “the survival of archaic institutions”, or some inability to contract some ‘modern man’ (Inkles, 1969) syndrome; on the contrary, it is generated by the same capitalist development that led to the domination by economic advanced countries, that is, “the development of capitalism itself” (Frank,  1969). Capitalism, hence, is an operation that cements a peripheral latifundium system, via the constant forces of ‘primitive-accumulation’, what Myrdal (1957) defined as international ‘backwash’ effects, that reproduces a cleavage between ‘town and country’, centre and periphery, on a tremendously enlarged basis (cf. Bukharin & Lenin, 1929).
Viewed from this standpoint, dependency theory is a manifestation of what David Harvey (1978, 2007) defines as ‘accumulation by dispossession’ by virtue of which dialectical forces of motion and contradiction generate vast disparities of wealth and power on a worldwide scale. The world economy is reproduced as a world-system (Wallerstein, 1979) of ‘unequal exchange’ (Emmanuel, 1972; Amin 1974, 1976), in which ‘underdevelopment’ ensues peripheral internal long-run stagnation (Bornschier & Chase-Dunn, 1985, pp. 39-40). The terms of trade for the periphery fall precipitously – this is the Prebisch-Singer hypothesis (Prebisch 1950). As Samir Amin (1976, p. 292) notes, “whereas at the center growth means development, making the economy more integral, in the periphery growth does not mean more development, for it dis-articulates the economy. Since the imbalance of international trade defines the mechanisms by which capital is drained from former colonized countries, there is no way for peripheral countries in the world economy to ‘catch up’ in Rostowian fashion (p. 383).
Nevertheless, the social facts that constitute the particular social conditions for the constant negation of a ‘just price’ in international trade ‘admits of varying interpretation’ (Frank, 1977). Case in point is the extent to which the periphery is in fact ‘peripheralized’. To suggest that the capitalist world economy simply, by definition, produces a centre-periphery polarity (Frank, 1967; Wallerstein, 1974), is to pay insufficient attention to understanding the extent to which economic development in the periphery is a convoluted association of varying social processes, rather than the mere result of a state’s homogenized world-systemic position (Gellert, 2010).
According to Cardoso and Faletto ( 1970), for instance, development in the periphery, while controlling for socioeconomic income differentials, is likely if foreign capital penetration creates spillover effects. That is, partial economic growth is viable through what Peter Evans (1995) describes as the practice of an ’embedded autonomy’-an apparent solidified social network between the state and civil society (which consists of economic elites from the centre) that creates the capacity for the state, as such, to engage in domestic Keynesian aggregate demand management. Whether this is manifested is the extent to which a peripheral country does not suffer the inability to borrow in its own currency, in which a country, most likely a developing one, supplements its domestic unit account of fiduciary reserve assets with a foreign currency. This is the exemplification of a country foregoing its national ‘monetary sovereignty’ (Mundell, 1961).
The essence of national ‘monetary sovereignty’ is the cartelist (or chartelist) (Goodhart, 1998) conception that emphasizes state power to establish a particular unit of account, a national currency, which allows economic calculations to take place (Ingham, 2004). In this sense, money is a means for accounting for and settling of financial debts, the most important of which are tax debts, which, in turn, regulate the level of aggregate demand, and thus determination of national income through the use of fiscal policy; it represents a [store of financial value] […] [of which] general purchasing power is held […] (Keynes, 1930, p. 3).
In the United States, for example, and in contrast to James O’Connor ( 2002) and Erik Olin Wright’s (1979) fiscal sociological model for analyzing the intricacies of public finance, which narrowly centers on a hypothetical natural limit to fiscal policy (Wright 1979, p.157), the federal government, through open-market operations, sells government bonds, Treasury securities, which are either bought or foregone by the Federal Reserve (Fed). If the Fed commits to a policy of purchasing Treasury securities, the interest rate by which the Federal government is liable on Treasury securities held by the Fed is lowered. Symmetrically, if the Fed sells Treasury securities, the Federal Government’s interest burden, which is paid through taxes denominated in dollars, is raised. By providing a guarantee for State debt, the Fed delivers the capability for the federal government to use fiscal policy to regulate aggregate demand. Thus, the extent to which fiscal policy is an option is determined by the burden of the federal government’s interest payments on Treasury securities to the Fed (cf. Lerner, 1943; Domar, 1944).
From this perspective, ‘underdevelopment’, or ‘dependency’, is the powerlessness a peripheral country to establish its own unit of account and thus is forced to variably peg its national currency to a foreign reference currency. What ensues is the inability to use monetary policy-central bank purchasing and selling of government bonds denominated in the domestic currency for purposes of controlling the money supply, and thus the cost of credit-, and fiscal policy, via deficit spending, for domestic economic needs. Since the central bank is forced to maintain a certain level reserves of the foreign reference currency such that the price of the domestic currency, in terms of the reference currency, does not change, this produces a negative money-multiplier that sets in motion an inherent deflationary bias, which, if not counteracted by capital inflows to spur aggregate demand, can lead to abrupt contraction of the monetary base, stinting any supposed progress towards economic sustainability (cf. Fields & Vernengo, 2012, 2013).
Thus, if any form of government spending is to be engaged, an ‘underdeveloped’ country has to issue bonds that are not denominated in its own currency. This amounts to the attraction of external commercial loans with the faith of the country’s financial markets by foreign investors used as collateral. As such, country risk is most likely going to exist. If confidence is lost in the strength of the country’s financial markets, leading to a spread over bonds like US treasury securities, if the foreign reference currency is the dollar, for example, interest rates on domestic foreign currency denominated bonds are likely to rise, making government spending very costly, which removes any form of domestic capacity to spur public investment as an effective countercyclical policy in the face of economic downturns. This has been essentially the case of Argentina before the 2001-2002 crisis, and of the European periphery since the intensification of the Greek crisis in 2011.
Balance of payments constraints can be quite unsupportable, spawning self-fulfilling financial collapses. Moreover, they altogether constitute an ideological mask that normalizes the advance of global cosmopolitan money-capitalist power to dictate the terms of domestic democratic politics (Ingham, 2008). As such, the extent to which a country is ‘peripheralized’, is the degree to which its creditworthiness is essentially evaluated in terms of the degree to which the state takes steps toward lowering the social wage for the benefit of multinational corporations from the centre (or core).
This article was originally published at Naked Keynesianism.
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