Poverty and low productivity place limits on the market. However, by themselves small markets under conditions of low productivity do not hinder growth, although under modern conditions they do. Where productivity of labour is low, say at the beginning of capitalist development in England, a small market can support many competing producers a few of whom, by increasing their productivity above that of their fellows, might ease themselves into dominant positions in the market and yet be small enough in relation to it not to be able to satisfy demand completely. Under such conditions competition for an existing market leads to a diffuse, general increase in productivity which, in itself, enlarges the market. Where productivity is initially high and purchasing power low this type of development is not to be expected. It is even hindered. High productivity in modern industry together with its high capital intensity (that is, great initial costs) and with its technical discontinuities which rule out the possibility of gradual growth in capital structure through many small accretions to capital, lead inevitably to the establishment of “natural” monopolies in backward countries. This itself tends to perpetuate the limited size of the internal market as would-be competitors are effectively kept out. [1]
This point needs, perhaps, some elaboration. During the early phase of capitalism in Britain, for example, the absolute magnitudes of productive investment bore a direct relation to the level of productivity of the time. In Indonesia and the backward countries generally the absolute level of investment bears no relation to the level of productivity within the economy itself but is measured in terms of the productive forces obtaining in the developed economies of the world. For the British farmer of the seventeenth century a horse-drawn cart was sufficient to bring his produce to the market; for the Indonesian tani with the same level of productivity a railroad is a necessity if he is to meet foreign competition. For the British State of the time a few dirt tracks were sufficient to control the country in an era of sluggish communications; the Indonesian State needs planes, air-fields etc. A modern economic is necessary despite the exiguous nature of the means to support it; backward Indonesia must maintain a complex industrial and administrative system quite out of proportion to the resources she can command; has to invest funds which bear no relation to the amount of voluntary savings.
1. Pre-war, half of the general import trade was in the hands of four Dutch houses; four-fifths of the technical imports were handled by five firms; three-fifths of the medical and pharmaceutical supplies by two firms; most of the motor cars by three firms, and so on.
This text is extracted is from Chapter II Problems in the Demand for Capital (pp. 80–82) of Mike Kidron’s unpublished thesis:
Kidron, Michael. 1957. Problems and patterns of development in overpopulated backward countries with special reference to Indonesia. M.Litt. University of Oxford, Faculty of Social Studies, Balliol College, 289pp.
Last updated on 10 April 2020