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17 November 2001

Economic Factors Necessary for Development: The Kindleberger Scheme

Donald Von Eschen

In his book, Economic Development, Charles Kindleberger distinguishes six economic factors
he believes important for economic growth. One way to analyse the impact of a society's economic
institutions, state structure, and system of social stratification on its economic development is to ask how
these affect each of Kindleberger's six factors. Thus, this paper gives a brief exposition of Kindleberger's
scheme.

Kindleberger's six factors are:

Resources
Capital
Labor
Organization
Technology
Scale

Their meaning and the reasons he believes them to be important are described below. (In
many cases, I have elaborated on Kindleberger's arguments and supplemented them, so Kindleberger
should not be held responsible for all the arguments in this exposition.)

1. Resources

By resources, Kindleberger means largely land (for agriculture) and minerals (for industry and
export). The reference here, then, is to natural resources. A society, he argues, will be more wealthy to
the degree to which it fully exploits its natural resources. This requires two things: the creation and
maintenance of resources, and the full employment of resources.

(a) Creation and maintenance.

Here, Kindleberger argues that natural resources are not something just given by nature; to a
large degree they have to be created and maintained. A simple example is land: The soil in tropical
areas can be improved through wet-rice agriculture; the soil on mountain sides can be improved through
terracing; arid land can be brought into cultivation through irrigation. Conversely, land can be exhausted
through over-cropping and the failure to use rotation crops; irrigation works can be allowed to deteriorate;
and the like.

(b) Full employment.

Land again offers a convenient example. Land can be underutilised by failing to farm it, or to
farm it intensively, as when large landowners leave part of their land idle, or use much of it only to pasture
a few animals.

2. Capital

By capital is meant two interlinked things: (a) Saving and investment. (b) The creation of
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physical capital; that is, physical items used in production, such as factory buildings, machines, roads,
irrigation works, and the like. This dual meaning is the one traditionally used in economics. The rationale
is that a society will become more wealthy to the degree that it saves part of its current income and
invests it in the creation of physical items that can be used in future production; items which, thus,
increase the productive capacity of the society.

The necessary saving can be done either by private individuals and firms, or by governments
(who can tax, and then invest the revenue in roads, power plants, steel mills, and the like). And it can be
done on both a large scale, as when a bank subscribes to a stock issue to build an automobile assembly
plant, or on a small scale, as when an individual farmer decides to invest in additional farm buildings,
agricultural implements, irrigation facilities, and the like. What is important is that the rate of saving be
fairly high; high enough to replace physical items used up in past production and to add additional items
so that productive capacity will be expanded.

Physical capital can be divided into several categories. The two traditional ones are plant and
equipment, and economic overhead. Plant and equipment are such items as factory buildings, textile
machines, agricultural implements, and the like, which are used by individual firms or enterprises.
Economic overhead consists of such items as power plants, roads and railway lines, telephone systems,
and the like, that are used jointly by several firms or enterprises.

In recent years, economists have begun to argue that too much emphasis has been placed on
physical capital; that investment in human capital is also of great importance. Investment in human
capital is investment that raises the skill level of the work force and its energy (that is, its health). This
shift toward emphasizing human capital is partially a result of certain postwar experiences; particularly the
rapid post-war recovery of Europe, where physical capital had been severely damaged by the war, and
the rapid growth of the economy of Israel, which started, according to one image, with very little physical
capital. The argument is that these areas were able to grow so rapidly in part because of the high level of
human capital. In the case of Europe, physical capital had been destroyed, but the skills of the
population remained. In the case of Israel, the country benefitted from the immigration of highly skilled
persons from Europe.

Much of the investment necessary to raise the level of human capital is not investment in
physical items, but in such things as paying the salaries of teachers, the fees of doctors and nurses, and
the like. Some of the necessary investment, however, is investment in physical items; for instance,
school and hospital buildings, housing (for shelter), sanitation facilities such as effective sewer systems,
water filtration plants, and so forth. This type of physical capital is sometimes referred to in the literature
as social overhead.

3. Labor

In keeping with the new concern with human capital, this factor focuses on the labor force of
the society. The focus is on the bulk of the labor force, not on managerial personnel, businessmen,
scientists and top engineers engaged in technical research, and the like. These latter will be dealt with
later under other headings.

The argument here is that a society will be more wealthy to the degree that it creates and fully
employs a high quality labor force that is efficiently distributed among jobs. This argument points to three
major characteristics of a labor force: its quantity, its quality, and its distribution.

(a) Quantity.

Here, the assertion is that, all other things being equal, more wealth will be produced the
higher the proportion of the potential work force that is actually set to work and the longer the hours this
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work force works. The former will be high when unemployment is low, and when women participate in
the work force. Thus, for instance, it has been argued that the Soviet Union attained such rapid rates of
growth up to 1960 in part due to the full employment policies of the government and the widespread
employment of women outside the home.

(b) Quality.

Quality refers to the industriousness of the work force (that is, its commitment to work), its
level of skill, and its health (that is, its physical ability to work hard). Some of the factors that may affect
the quality of the work force are the following: Presumably workers will work harder when they are given
a positive material or moral incentive for doing so, rather than when they are coerced to work. Their skills
will presumably be higher when they have sufficient income to invest in their own training or that of their
children, and when society provides adequate educational facilities, both in terms of the availability of
schools, and the relevance of the education given in those schools to work skills (as opposed to
education that emphasizes, for instance, knowledge of literary classics, classical philosophy, and the
like). In agriculture, the skills of the farmers may depend in part on the existence of agricultural extension
services. Finally, the health of the work force will presumably be higher when it has sufficient income to
purchase health care, when the society provides sufficient numbers of doctors, when adequate public
health measures are undertaken, and the like.

(c) Distribution.

Here the argument is that greater wealth will be created if those with the most motivation,
talent, and skills get those jobs where these traits are most important. This requires, first, that talented
individuals from the lower social strata be permitted to rise to jobs equal to their abilities; and, second, it
requires that workers are willing and able to move from one part of the country to another where their
talents and skills are most needed. In short, it requires both social and geographical mobility.

4. Organization

The argument here is that it is not enough for a society to create and fully employ resources,
to have high rates of savings and investments in physical capital, and to have a high quality labor force.
These factors must be allocated among alternative uses, and they must be combined and coordinated in
the most effective manner. Thus, it is not enough that a society has a high rate of saving and investment;
investment must be allocated to those sectors (industry vs. agriculture, heavy industry vs. light) and
industries (e.g., steel vs. aluminum, machine tools vs. electronics) which will contribute most to the wealth
of the society; and within industries, it must be allocated to the most efficient firms--that is, those that
maximize output for a given level of inputs. Or, to take another example, it is not enough that a firm hires
high quality labor, it must allocate this labor to particular tasks, supervise it, eliminate duplication, and
coordinate its efforts in order to ensure that it is used in the most efficient manner. These tasks of
allocation and coordination are tasks of organization. In this view, a society will be more wealthy to the
degree to which it efficiently organizes its productive activities.

In principle, these tasks of organization could be performed by the workers themselves.

Within factories, for instance, workers could elect workers' councils which could make the necessary
managerial decisions. And workers could similarly elect representatives to state planning boards that
would decide on how resources should be allocated between sectors and industries. In practice,
however, in most societies these tasks of organization are performed primarily by businessmen,
managers in private or public corporations, and bureaucrats in planning agencies. In a private enterprise
economy, it is largely businessmen--often bankers--who decide where investment should be allocated. In
both private enterprise and state run economies, it is generally managers who decide how a firm is to be
organized internally. In state run economies, it is largely bureaucrats in planning agencies who decide
how resources are to be allocated between sectors and industries. It is to be noted that this task of
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organization exists in the agricultural sector as well as the non-agricultural one. In the agricultural sector,
it is the farm operator (the planter, the hacendado, the family farmer) who generally decides how to
organize production.

If these persons are to do a good job of organizing productive activities--that is, a good job of
allocating the factors of production, and of combining and coordinating them--they presumably need to be
motivated, talented, and skilled. For businessmen, being motivated means in part being oriented
principally toward maximizing profit rather than leading the leisurely life of the cultured rich. For the
private businessmen and managers, and public managers and bureaucrats, motivation, talent, and skill
are likely to be greater if persons from the lower social orders with these characteristics are permitted to
rise to these positions. And skill is likely to be greater if persons in these positions have had formal
training in schools of management.

5. Technology

Many writers regard improvements in technology as the chief factor responsible for the
increased wealth of humankind. By improvements in technology is meant inventions which permit, with
the same resources as before, the production of new, more, or better products. Examples are: the
development of hybrid seeds in agriculture, which permit more output on a given amount of land; the
invention of new types of agricultural implements, which permit greater production with a given amount of
labor; the development of synthetic materials using waste products from the production of other products,
thus increasing the amount of output for a given amount of raw materials; the invention of new techniques
of making steel, which permit the production of higher quality steel in a shorter period of time with less
labor; and so forth.

A society, it is argued, will be more wealthy to the degree to which it has the capacity to invent
new technologies, or at least to adopt them from abroad and adapt them to local circumstances. It is to
be stressed that even adoption and adaption require considerable effort, talent, and skill. This is true for
at least two reasons: First, adoption requires an extensive search process, in which the individuals doing
the searching have to have the training and knowledge to recognize when a technique developed
elsewhere is roughly appropriate for local circumstances. Thus, for instance, engineers in an
underdeveloped country have to determine which of the steel technologies used in the economically
advanced countries are appropriate to their own local sources of energy, the type of iron ore deposits
they have, the relative availability of skilled vs. unskilled labor, and the like. Second, only rarely can a
technology be located which is perfectly fitted to local circumstances. Thus, it generally needs to be
modified (that is, adapted) to be fully effective, and this modification, in effect, requires invention.

The ability of a society to invent, or to adopt and adapt, is dependent on many factors. It depends, for
instance, on the quality of higher education available in the society--that is, the quality of the education
given to engineers, scientists, and the like. It depends, in agriculture, on the degree of investment in
agricultural research stations, which experiment in the development of hybrid seeds. It depends on the
existence of research institutes. It depends, in part, on the skill and motivation of the work force, for
some inventions can be made by the workers themselves, and others can only be adopted if the skill and
motivation of the workers is sufficiently high.

6. Scale

Most economists believe there are important economies of scale in production. That is, they
believe that as production increases, the cost per unit of production decreases. As the scale of
production increases, therefore, the amount of output for a given level of inputs increases. The
argument, then, is that a society will be more wealthy to the degree it attains an adequate scale.
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Economies of scale can be divided into two types: Internal, and external.

(a) Internal.

Internal economies of scale are economies that arise within a firm when it increases output.
Such economies arise, in part, because many inputs are "lumpy": that is, they are as capable of
producing a large number of units of output as a few. To take an example, a textile machine of minimum
size might be as capable of producing 1,000 yards of cloth in a day as 100 yards. If the machine is used
to produce only 100 yards, rather than 1,000, it will, thus, be under-utilized, and the cost of the machine
will have to be spread over only 100 yards rather than 1,000, thus making the cost of each yard
considerably higher. If, on the other hand, the textile operation can grow in size so that the machine can
be fully utilized, then economies of scale will be attained. Machines are not the only inputs that may be
"lumpy". So, too, may managerial inputs, inputs of skilled labor, the establishment of research and
design departments, and so forth.

(b) External.

External economies of scale are economies that a firm obtains when other firms are
established and/or attain internal economies of scale. A firm must buy inputs in order to produce. These
inputs are largely purchased or in other ways obtained from other firms. If no domestic supplier exists
capable of supplying an important input, a firm can benefit when such a supplier is established. It will
benefit even more if that supplier can attain internal economies of scale, for then the supplier can sell at a
lower cost, permitting the firm to buy its inputs more cheaply. In short, the more firms in a particular firm's
environment, the greater the variety of these firms, and the greater the degree to which these firms have
attained internal economies of scale, the lower the cost at which the firm in question can get its inputs.
The existence of other firms may help the firm in question not only purchase raw materials and physical
inputs (i.e., parts, machines, and the like), but even labor; for the other firms will have trained labor that
the firm in question may be able to entice to work for it.

What factors determine scale? Two important ones are the following:

(a) The distribution of income.

When income is widely distributed, there will be substantial demand for the products of a wide
range of industries in a society. High demand will permit firms to expand their operations sufficiently to
attain internal economies of scale. It will also ensure that there is a variety of firms so that any particular
firm can purchase its inputs at lower cost. If income distribution, however, is very skewed, income being
concentrated in the hands of only a small part of the population, demand will tend to be principally for
luxury goods, many of which may be produced abroad (such as Mercedes), rather than for the broad
range of products produced by mass consumption industries.

(b) The character of the transportation and communication system.

A good transportation and communication system will lower the price of the firm's products to
its consumers, for the consumers will not have to pay high transportation costs. This will increase the
demand for the firm's products, and thus help it in attaining sufficient size to obtain economies of scale. A
good transportation and communications system will also permit it to buy its inputs from other firms more
cheaply (i.e., to attain external economies). As the firm obtains these external economies, and thus
lowers its cost of production, it can then sell its products to its consumers more cheaply, thus permitting it
to sell more of its products. This increase in production, in turn, will allow it to attain additional internal
economies of scale. Furthermore, this increase in production will lead to a greater demand for inputs,
thus helping the firms that supply its inputs to increase their production and, thus, themselves arrive at
internal economies of scale. And so forth.