Munich Personal RePEc Archive

The poverty of nations

Freeman, Alan (1996): The poverty of nations. Published in: LINKS No. July-October 1996 (July 1996): pp. 35-58.

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Abstract

Why, despite unceasing technical advance, do most people live in growing poverty, and why has the inequality between nations increased apparently without limit throughout the history of the world market? Thes two deeply-related (though distinct) problem reduce to the following: how is it that technical progress, which for the first time makes it physically possible to liberate human beings from subjection to Nature, not only maintains but produces and reproduces social regression, deprivation and division?

Answers to this question divide, simply, into two: theories which treat polarisation and poverty as exogenous to the market and those which attempt to show they are an endogenous product of the market. For the first group of theories, which recognise the theoretical coherence of mainstream accounts of trade such as the Samuelson Factor-Price theorem, the natural tendency of the market is not only to optimise but also to equalise. Equalisation, whilst it does not follow with necessary logic from the fundamental theorems of microeconomic equilibriam such as Pareto optimality, does so follow on the basis of simple additional assumptions which appear not to be violated in the world today, and the fact that it occurs is in consequence counterfactual to existing theory. If the fundamentals of general equilibrium economic theory are to be maintained in the face of the evidence of long-term trends in world inequality, polarisation must be explained as an outcome of institutional or other factors outside of the market: history, governance, accident, or culture.

Other authors, such as the dependency theorists (of which Gunder-Frank's 'Development of Underdevelopment' is perhaps the most emphatic example), assert that it is the market itself that produces polarisation. This body of work, notwithstanding, has failed to generate an explanation which is both coherent, general, and rigorous, of how the market can do this.

The purpose of this article is to demonstrate that there are mechanisms intrinsic to the market and indissociable from it, which necessarily generate polarisation. These mechanisms however cannot be explained on the basis of the assumptions of general equilibrium or any theory based upon it. They arise from technological rent, once known as super-profit or surplus-profit, the differential profit earned by the owners of superior means of production. Any theory rooted in the assumption of equilibrium necessarily ignores (in fac, suppresses) the effect of differential rent which, notwithstanding, creates positive feedback creating an effective monopoly of innovation in the hands of those countries in which the most advanced means of production are to be found, as has been noted - but not explained - by writers such as Khor.

The article details a value-theoretic concept of the mechanisms of long-term polarisation and demonstrates that such an explanation requires the abandonment of the assumption of general economic equibrium and the adoption of a temporal methodology.

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