ACDE Trade & Development Seminars
Date & time
The literature on development economics does not look good under the microscope. The fashionable focus on productivity mistakes a definition for a theoretical insight. Contrary to the conventional wisdom, the low-productivity services sector played a bigger role than industrialisation in the development of what are now the advanced economies, and it continues to do so in most of today’s developing economies. Many contributors to the literature emphasise the average product of labour rather than its marginal product as the central concept in the efficient allocation of labour across sectors. Since markets allocate labour by equalising its marginal product across sectors, and since average products generally differ when marginal products are equalised, the focus on average product differences leads to the incorrect policy conclusion that the market outcome is allocatively inefficient, and therefore that government intervention is needed to push more labour into high average product sectors—in particular, manufacturing.