Economics beyond Demand and Supply

All of us have been taught about the simple demand supply , IS LM Curve etc. etc. in Macroeconomics. Although the principles hold true, I believe they are just one among the many factors that affect economic development.

US economy performed well in 20th century not only because of favorable demand –supply dynamics there were other factors responsible for growth and development. Most Middle east countries have abundant natural resources ( namely OIL) but are way behind in terms on innovation , human development index , Ginni’s coefficient ,literacy , employment etc .England did not have natural resources worth mentioning , but had a supporting social structure which was responsible for it’s dramatic rise in 19th century.

I believe the following factors are as important or more for sustained economic development.

•Social: This is the most important factor for sustained economic development. If a society is open to change, is merit based , encourages innovation , well educated ( merely being literate is not enough), fair , has enough checks and balances to avoid excesses I believe seeds of prolonged economic growth are already sown.

India for one never had a fair society for millenniums together, social movement was restricted,
women largely are not part of workforce; large sections of the society were not permitted to take education and so on. But this just shows how much latent potential Indian society has to aid economic development in coming decades.

•Political: Imagine a political system where politicians do not want people to be educated, economy to develop to perpetuate their rule . There are basically two ways former is the easier way, the tougher one entails economic development and deriving political mileage out of it . Sadly Indian politics in 70s and 80s ( in fact till recently ) was of first type. There is no example of a banana republic doing well economically over longer run.

•International Relations: There are so many countries that have benefitted because of their proximity to certain countries . UK , Japan , Korea benefitted immensely from US. South America is an contrary example. Of course, it is incumbent on politicians of any country that this factor is positive for them, but it may not always be the case.

•Natural Resources: It is said that presence of natural resources greatly contributes to economic development. There are not many examples where natural resources alone can single handedly ensure economic development . There is enough research material that suggest that presence of natural resources Crowds out of Innovation and hence may not be of any help over longer run. Perfect example : Middle East .



•Demographic: Population was considered bane till a decade ago , till a concept called Demographic Dividend arrived . Japan did not have favorable demographics and the economy stagnated since 1990 . I believe It is a very important factor for developed countries. Sadly continental Europe , Japan and to an extent US do not have favorable demographics.

•Geographic: Ask anyone in Land Locked Country and you’ll know how important this factor is . Favorable geography, whether patterns etc. will be positive for any economy. India has a huge advantage on this front .

•Historical: I believe this is a factor that influences social, political factors and hence it only indirectly affects for example, a child born in US or UK gets a head start because of well-developed infrastructure and society as compared to developing countries.