13 The Economics of the

Frontier
GUIDO DI TELLA*

This work analyses some peculiarities of the economic expansion of

the frontier and of the process of growth based on it. First, rather
succinctly, it examines some of the main frontier expansions, so as to
understand the nature of the historical processes which have given
rise to our kind of questions. It then proceeds to the analysis oftwo
different concepts of the frontier.
The first, the more neo-classical, considers the frontier as being in
a state of equilibrium -even if moving. The other, much less neo-
classical, takes the frontier to be in a state of disequilibrium, which is
more relevant for the interpretation of the expansionary processes in
question. An analysis is then considered of the theoretical con-
sequences of the two different conceptions of frontier expansion on
the possible growth path.
Not only are there reasons why the disequilibrium type of
expansion may be more dynamic but there are also reasons why a
certain faltering of the rate of growth, at the close of the frontier,
may be the most likely outcome. Finally, we shall attempt a broader
view of the process of growth where the frontier case can be
identified as a special instance of growth based on non-normal
profits.

SOME FRONTIER MOVEMENTS

The western world has seen several great expansionary waves. Even
though the earlier examples are only remotely suggestive of what we
* Some of the arguments used in this paper are an extension of those presented by
the author, some time ago (di Tella and Zymelman, 1960, 1967). The present

210
 The Economics cif the Frontier 211

have to say later on, an overview of some of them may still throw
light on our problem. The expansion of Europe from the tenth to the
thirteenth century is a case in point, most clearly visible in the
German eastward movement- the Drang nacht Osten- and in the
Spanish expulsion of the Moors- the Reconquista- which lasted
somewhat longer.
At the beginning of this process, and in relation to population,
land was plentiful and easily available. A frontier movement took
place, based on the existence of virgin land. Europe transformed
itself from 'a vast wilderness into a well colonized region' (North
and Thomas, 1973). But 'until the middle of the thirteenth century
land was amply available and as development took place the
frontier continually expanded' (Cipolla, 1976). While in previous
centuries large tracts ofland had been left unoccupied, at the end of
the expansion land was virtually entirely incorporated into the
economy. While land was available, development took place, but
when it was fully absorbed, the process came to a halt (although
strongly influenced by independent events like the great plague of
the fourteenth century). In the Spanish case, the expansion of the
frontier was to a great extent the consequence of demographic
pressure in the north from the tenth century onwards, and the
search for new, more fertile land, a set offactors which explains to a
considerable degree some of the dynamism of the Reconquista. Except
for an initial stage during the crossing of the so-called 'Duero
desert', the new lands were not empty but their populations were
partially evacuated, either at the time of the conquest or just after
(Vicens Vives, 1957-9). The expulsion ofjews and Moors was not
generally intended to achieve religious homogeneity.
The eastward expansion of Europe, which had come to a halt in
the thirteenth century, was resumed later on by the Russians in
Asia, assisted by the new military technology of the fifteenth
century. However the European superiority on land was not as large
as its superiority on the seas, a consequence of the great improve-
ments in naval technology (cartography, astronomy, and auxiliary
sciences) which made possible the Spanish and Portuguese conquest
of the New World. This process had much in common with the
previous expansion in the Iberian peninsula, i.e. in the allocation of
land to the conquering armies, the treatment of the new subjects,
version has greatly benefitted from discussions held with J. Fogarty, E. Gallo, C. P.
Kindleberger, D. C. M. Platt, and A. Petrecolla, although the responsibility for the ideas
set forth remains with the author.
212 Models and Methodology

etc. After an initial stage in which existing gold and silver was
pillaged and the native population decimated, a second and more
permanent stage opened up where the incorporation of land,
whether agricultural or mineral, became of central interest and
where population was looked on as a source of manpower, through
different systems of indentured labour- encomiendas, mitas. In this
second stage new land and new labour were considered the basis for
the creation of rents, profits and wealth. While in the Spanish
Reconquista the demographic push was as important as the pull
exercised by the possibility of appropriating new resources lying
beyond the frontier, in the conquest of the New World the pull of
new resources was more important (Elliot, 1963).
These frontier expansions are interesting in themselves but the
expansion which has bearing on our story is that which took place in
the late eighteenth and the nineteenth centuries, for the group of
countries described as areas of 'recent settlement' (Nurkse, 1959).
This expansion, over the American West, Canada, Australia,
New Zealand, Argentina, the South ofBrazil and South Africa, was
even more impressive than those of previous centuries, and if one
adds ·the expansion of Russia over Siberia, it shaped the Western
world of today. Again these processes were characterised by the
initial existence of abundant land, mostly unoccupied, and by a
substantial migration of capital and people. This dramatic expan-
sion was the consequence of the ascendancy of Great Britain and of
new technologies that made it possible. New armaments, coupled
with better and cheaper ocean and land transportation, allowed the
effective occupation of vast areas which had been known for some
centuries but had barely been colonised on some of their borders.
While the initial American settlements were clustered near the
eastern seaboard, after Independence, in less than a century they
reached the western seaboard. As Turner quoted:

up to and including 188o the country had a frontier of settlement,

but at present the unsettled area has been so broken into by
isolated bodies of settlement that there can hardly be said to be a
frontier line. (Superintendent of the Census, 1890)

Turner was quite aware that this initial American expansion was a
unique and unrepeatable experience. He thought, however, that the
expansive character acquired by American society during its
frontier days, would ensure that development would go on 'though
 The Economics rif the Frontier 213

continually demanding a wider field for its exercise'. The idea was
clearly there that a qualitative change was to take place at the close
of the frontier, although not necessarily that a lull would follow.
This process was repeated in the other areas of 'recent
settlement'. In Canada the westward expansion was to a substantial
extent the consequence of the search for these abnormally high
profits to be derived from the exploitation of recently discovered
natural resources (Innis, 1930).
The expansion proceeded by several expansionary waves, some of
them into areas suited to the fur trade, while others -later on- were
based on the incorporation of agricultural, timber and mineral land.
At times natural obstacles brought the westward expansion of the
frontier to a halt, but it was not uncommon that 'relatively minor
links (like bridges and canals) were essential to complete a change
and were followed by extraordinarily rapid development' (Innis in
Neill, 1968). Either because of the different natural resources
involved in the discontinuity in the building of the 'links' to
overcome physical obstacles, the westward expansion proceeded by
spurts, a concept that lies behind the staple approach developed by
Innis and his followers. The countries in the southern hemisphere
followed a not entirely dissimilar pattern. In Argentina (di Tella
and Zymmelman, 1967) the peculiarity was that the frontier
movement was based exclusively on agricultural and pastoral land
and ended not at any clear natural boundary but on the more
imprecise limits imposed by the arid areas of the west and south and
by the woodlands of the north. In the case of Australia, the
expansionary waves were the consequence of bringing into the
economy agricultural and pastoral areas, inter-mixed with mineral
discoveries (Macarty, 1964; Fogarty, 1966).
The nineteenth century territorial expansion had come to an end
by the beginning of the twentieth century when most of the better
and more fertile known lands were already incorporated into the
respective economies. A last territorial burst took place in the early
part of the twentieth century, as a consequence of the dry farming
techniques, as in the case of Australia, and somewhat later, in the
middle of our century when the world witnessed the so called
'opening of the tropics', as new technologies allowed the cultivation
of high temperature areas.
This is not to say that development took place only in these areas
and at these junctures, but that certain common characteristics set
them apart from other expansionary processes, increasingly
 Models and Methodology

important, which were based not on the incorporation of natural

processes, but on the accumulation of capital and in particular on
technological innovation. Our version of the Frontier can be
considered to some extent as a model with 'limited supplies ofland',
akin toW. Arthur Lewis's model of growth with 'limited supplies of
labour', but with a factor changed.

THE TWO DIFFERENT KINDS OF FRONTIERS

In order to understand the economies of the frontier movements
which we have mentioned, it is helpful to think in terms of two
different kinds of economic frontiers, one that fits easily into the
neoclassical model, and the other that does not.
In the neoclassical version the frontier is the place where the
marginal cost of agricultural goods is equal to its price, i.e. where
rent is nil. In the areas which lie short of the frontier, differential rent
is possible, the greater the further away from the frontier; expansion
is assumed to proceed first into the more productive lands, leaving
for later the less productive. This concept of the frontier, as a no-rent
locus, is shared by neoclassical economists and by some who are not
so neoclassical (Joan Robinson, I965). If costs are reduced (C_,, C0 ,
cI' c2 and Ceq in figure I 3. I), or if prices are increased, the frontier
expands.
The reduction in costs can be assumed to be a permanent trend in
the long term, as technological improvements are bound to take
place rather indefinitely, even if some kind of diminishing returns to
innovation will eventually appear. But what has to be pointed out is
that the level and rate of change of technology and the location and
rate of expansion of the frontier are closely interrelated. A rise in
prices can also force an expansion of the frontier but this cannot be
easily assumed to be a permanent trend. On the contrary, if the
developing areas are very significant, their output may depress
prices and therefore have a restraining effect on the expansion of the
frontier. In this description of the frontier, there is nothing that
explains the abrupt nature of the expansions described initially and
in particular the idea of a process that has a beginning or an end.
While at certain stages the expansion of the frontier can be of this
neoclassical kind, it is claimed that the significant expansions we have
mentioned, particularly the latter ones, require a different interpre-
tation i.e. one that assumes a kinked cost curve of agricultural goods,
instead of the usual smooth positively sloped curve.
 The Economics of the Frontier 215

Equilibrium version
FIGURE 13.1

c_1 Co cl
$
0

Disequilibrium version (a) Disequilibrium version (b)

FIGURE 13.2a FIGURE 13.2b

If each drop in costs is marginal the expansion takes place

instantaneously; only the equilibrium situations (- 1, o, etc.) are of
interest. If on the other hand, the initial drop in cost is sharp, (from
c_, to c in Figure Ig.2a) not only the initial and final equilibrium
points (- 1 and eq in Figure 13.2a) are of interest but also the
intermediate positions depicted by the kinked cost curves (C0 , C ,
etc. in Figure 13.2b), instances of the adjustment process. 1

The reason for the kink is that although the conditions for the
expansion of the frontier exist, there has not been enough time to
move resources, people and capital to the ultimate frontier. If time is
allowed, the frontier will move on. From the point of view of the
known long-term costs and prices the expansion of the frontier
should have taken place up to its no-rent limit. The frontier is in a
state of disequilibrium, bursting with business opportunities with
big profits and economic excitement, evidence of the existence of
rent at the frontier. Expansion takes place so as to appropriate the
potential rent which exists in the extra-marginal lands. It is a kind of
ex-ante rent which requires a known but not yet made effort, so as to
convert it into an ex-post rent.
216 Models and Methodology

In the real world the expansion of the frontier takes time. It is not
that easy to move capital to the frontier, build towns, lay railroads,
move people, clean land: the expansion ofthe frontier is part of the
adjustment to the new economic conditions, a moment of intrinsic
disequilibrium as indicated by the existence of rent at the frontier.
The existence of disequilibrium and its intensity are what lie behind
the dynamism of the expansionary process. To say that the process
comes to an end is to say that the neoclassical equilibrium situation
has finally been reached.
After this it is still quite possible for the frontier to move, but only
in a neoclassical way: i.e. through marginal movements, gradually
advancing, with none of the drama of the previous stage. As we have
seen the initial non neoclassical expansion can take place only if at a
certain point in time costs are drastically reduced, creating such a
huge economic opportunity that it can not be grabbed
instantaneously. The initial discontinuous and sharp drop in costs
(or an equally sharp rise in prices) is what sets the whole process
going on. We are back to the old idea that 'Naturafacit saltum', at
least at certain junctures which are the ones that interest us.
We may wonder which are the actual circumstances which may
cause this sharp downward shift in the cost curve. There are few
clear cut instances in which such a phenomenon necessarily takes
place, while in others it is just a coincidence of several
circumstances. The clear cut case is the outright discovery of a new
land, agricultural or mineral. One could say that before discovery,
costs were infinitely high, dropping thereafter to a point where
economic development becomes feasible.
Discovery, in economic terms, implies that producers become
aware that unappropriated rent lies fallow, so to speak, waiting to
be taken up. If one imagines the new land as being of homogeneous
quality, with a sharp and clear cut delimitation, the expansion will
be dramatic and the end will be sharp. As soon as the discovery takes
place, people and capital will move in. This will be the period of
frantic expansion which will continue until the whole of the land is
incorporated into the economy. Once achieved, this kind of
development comes to an end.
If we allow for differential quality ofland- a rather more realistic
assumption- the speed of expansion will depend on the amount of
rent to be appropriated, and the end will be more or less abrupt,
according to the shape of the cost curve. If costs increase gradually
 The Economics cif the Frontier 2I7

as the frontier expands, the tapering off of the expansionary process

will be equally gradual. If on the other hand, the cost curve remains
more or less constant until the very end, then the expansionary
process will end abruptly.
This interpretation assumes that the greater is the rent at the
frontier the more intense will be the efforts to expand it, and the
quicker will be the pace of expansion. This fact is in line with the
diminishing speed of incorporation of new land depicted in Figure
I 3.2a, or the pace of Figure I 3.2b, which varies according to the
variation of rent at the frontier as one can imagine situations in
which the incorporation of new lands does not proceed according
to their decreasing fertility, but according to their proximity. As has
been said of the early European case 'paradoxically enough, the
expansion ... was probably characterised by increasing marginal
returns ... (as) some of the areas taken into cultivation were in fact
better than those already cultivated' (Cipolla, I976).
It is not because of profits derived from new investment that
capital flows into new lands but because it can in some way get hold
of part of the rent. It is in profits-cum-rent that capital is interested,
not in profits alone. But the discovery of new lands may not be the
more common case. In many instances the so-called new lands had
been discovered for a long time but some of the necessary
preconditions for their development had not been fulfilled. The
most common of these preconditions is the military pacification of
the new lands, which very seldom are really empty spaces. Again,
one can translate this in terms of costs: considering those of insecure
areas as prohibitively high, falling abruptly after pacification and
opening the way to development. If the previous population can be
enslaved, or through some other legal artifice can be made to work
for a wage below its marginal productivity, another source of'rent'
may be created, actually an oligopolistic quasi-rent consequence of
the imposition of a non-market price for labour. But even if the
previous population was to be paid according to its marginal
productivity it would be welcomed, since it avoids the need and the
cost of transferring population to the new lands, eliminating one of
the most common reasons for the delay in the initial expansion of the
frontier. Pure discovery or military pacification are not the only two
reasons behind the abrupt fall in costs that starts on frontier
expansions.
Technological innovations of a cost-reducing kind are the other
218 Models and Methodology

significant cause, although they are less prone to provoke sharp

downward shifts in the cost curve. Still, in the nineteenth century,
the introduction of the steamboat and the railroad revolutionised
the cost of transportation, making possible the development of
enormous new areas. Although of less universal significance, the
development of freezing techniques allowed the export of meat and
the expansion of cattle raising in Australia, New Zealand and
Argentina.
Even if somewhat lagged, agricultural techniques improved
drastically, mostly as a consequence of the application of mecha-
nical power and of specific developments in harvesting and
threshing (particularly in wheat, cotton and maize). The process
had some parallels with the revolution in high farming that
transformed English agriculture in the second half of the nineteenth
century. The incorporation of new lands and the development of
new technologies interacted. While the effects of innovations and
cost reducing technologies on expansion are more clear, it is also
true that the inverse phenomenon was in operation, i.e. the effect of
the expansion of the frontier and its new needs on the innovative
capacity. In the American and Australian cases, the stimulating
effect on innovation of the abundance of land has been observed
(Habakkuk, 1962; Blainey, 1964b.), a fact which is true for other
new countries as well. The extraordinary economic opportunities
opened up by the expansion of the frontier and the set of relative
prices reflecting the availability of new resources stimulated the
development of new technologies. But of the two influences, the
effect of technological innovation on expansion was more intense
and clear cut than the effect of expansion on innovation.
Up to now we have talked of new agricultural lands, leaving aside
other resources such as minerals and oil. Although it is useful to
avoid undue generalisations, there is no good reason not to include as
part of the same phenomenon the case of mineral land, despite the
fact that the social and economic consequences have been quite
different. Particularly significant has been the difference between
the greater diffusion of the economic benefits of agriculture
compared to mining. The latter has given rise to enclave economies
more linked to the country or region supplying capital and
technology- or purchasing the produce- than to the rest of the
domestic economy, a phenomenon which is at times observable in
tropical agriculture based on the plantation system; even then,
enclave development has been better than no development at all.
 The Economics of the Frontier 219

But the distinctive characteristic of expansion based on minerals is

that the resource is depletable, so that the end of the frontier may
mean not only the end of growth but a reduction in the absolute
economic level previously attained. This is what has forced a greater
awareness of the transitory character of the expansion of the mineral
frontier compared with the case of renewable resources.
The difference between agricultural and mineral based develop-
ment may not be so sharp, as the expansion of the frontier has meant
at times the exhaustion of the fertility of the new land, making it
somewhat similar to mining. On the other hand, while mineral
exploitation clearly depletes resources, there is some kind of built-in
technological progress, allowing for a rather continuous process of
incorporation of new resources, making it a predictable aspect of
mineral exploitation. But while these exceptions may blurr the
difference, in certain instances, depletable and non-depletable
resources stand as a long-term distinction.
But what is clear is that in the nineteenth century it was a
combination of these factors: military pacification and tech-
nological innovations- in war, transport, agricultural and mineral
extraction- which lay at the root of the sharp reduction in costs and
the exceptional expansion of the frontier. The rise in prices up to
the 'seventies' accelerated the expansion, while conversely, falling
prices during the last decades of the century, hindered it to some
extent.
While disequilibrium conditions characterised most of the ex-
pansionary processes already mentioned, most of them showed an
alternation of non neoclassical, energetic frontier movements, with
more tranquil neoclassical equilibrium stages, 'Naturafacit saltum',
but not always.
As we have already mentioned, the disequilibrium version of the
frontier is very much in line with the so called Turner thesis and
with Innis's staple approach, the first emphasising the agricultural
frontier, the latter emphasising the existence of several frontiers.
Both are not incompatible with Adam Smith's 'vent for surplus'
concept, which emphasises" the crucial role of putting into economic
use formerly idle resources.
As in the case of the staple approach, the interrelation with foreign
trade is greatly stressed. The three are different ways oflooking at the
problem which we have studied here. A disequilibrium version of the
frontier has some forerunners of distinction.
220 Models and Methodology

THE GROWTH PATH

Although we have already touched on the problem, it is time to

analyse the implications of the two different kinds of frontier
development on potential growth paths.
In fact the more neoclassical version of the frontier implies in the
medium term a rather smooth and continuous rate of growth as a
consequence of marginal additions of resources and capital and
marginal improvements in the technological level. In this medium
term version the idea of a starting point of the growth process, or of
an end, is quite alien. In the very long run diminishing returns
would eventually be felt, reducing the rate of growth to nothing.
On the other hand, the disequilibrium version of the frontier does
have a distinguishable beginning as a consequence of the sharp drop
in costs (and /or the rise in prices) followed by an increase in the rate
of growth. This high growth stage will not last forever and will begin
to taper off as soon as the neoclassical equilibrium frontier is
reached. At this juncture, if no otherfactors intervene, the economy will
return to a lower neoclassical rate of growth, higher however than
the previous one prevailing in the neoclassical stage prior to the
expansion, as the increased rent will have certainly become a new
source of accumulation and investment. If, on the other hand, while
the expansionary wave takes place, the economy can develop a non-
resource based sector, it will find it easier to continue with a high
rate of growth, even if on a completely different basis.
If it does not develop such a sector and goes back to neoclassical
frontier based expansion, the rate of growth will certainly suffer. The
likelihood of one thing or the other depends on several factors,
derived from the circumstance that during the expansion of the
frontier all the extraordinary profits are made in connection with
the frontier, and that there will be few unrelated activities which
will show profits as high as the profits-cum-rents that can be
obtained at the frontier. But the expansion of the frontier does not
mean that only those activities which are physically located there
are the ones to benefit, as the newly discovered rent may just as well
be transferred, through some kind of oligopolistic manipulation of
prices, to the country which makes the discovery, quite in-
dependently of the normal benefits derived from the demand for
their products originating in the new areas. This is also important as
territorial expansion creates a demand for goods related to
investment at the frontier.
 The Economics of the Frontier 221

In the case of early developers, like the USA, a good part of this
demand was channeled to its own industrial sector in the eastern
states as not all the goods required were even available from Great
Britain or Europe. In the case of late developers this was not
necessarily the case, and one can see the expansion of the frontier
increasing the level of industrial activity of the mature countries
where local industry was scarcely capable of supplying the necess-
ary goods.
One of the most obvious factors which influence the impact of the
frontier on the overall growth process, is the relative economic
importance of the expansion compared with the previous size of the
economy. The smaller the economic significance of the frontier
expansion and the larger the previous size of the economy, the
greater will be the likelihood that growth will not suffer at the end of
territorial expansion.
At times the frontier expansion was huge in absolute terms, but its
economic significance compared with the rest of the economy was
not so great. This may have been the case even for the United States
compared with the Canadian, Australian and Argentine ex-
periences repeated in the case of the more recent tropical expansions
of the rg3os and rgsos.
But the most important factor determining whether an industrial
non-resource based sector can maintain the intensity of the growth
process after the close of the frontier, is whether the previous
expansion was just the consequence of one big single wave, or a
series of different waves interrupted at times. In the latter case there
will be an alternation of stages when the economy expands as a
consequence of the large profits made at the frontier-where new
resources are brought into the economy- and periods when the
frontier stops moving, and non-resource based growth resumes its
leading role, to be lost only when expansion starts again. But the
repetition of these waves and stoppages will mean that at the end of
the last expansionary wave, industry- the non-resource based
activity- will have attained considerable dimensions being able to
become its leading sector.
The whole economy will have a momentum not too dissimilar to
the previous rate of growth, perhaps fulfilling Turner's hope of
uninterrupted growth. In the more successful cases one can see the
existence of a multiplicity of expansionary waves. In the Canadian
and Australian cases the variety of different staples, some agricul-
tural and some mineral- equally important at times- allowed an
222 Models and Methodology

apparently smooth process of growth which in fact was the

consequence of the superimposition of self extinguishing spurts. In
the Argentine case there were no minerals, a basic difference with
the Australian case with which it has been compared; quite
peculiarly there was only one big expansionary wave with a most
distinct beginning, an astonishing rate of growth, and only minor
and short lived interruptions until its clear end around the First
World War. The boom of the I 920s which Argentines considered
a continuation of the pre-war expansion was in fact the consequence
of nearly a decade of increasing prices, blurring the fact that it was
an altogether different phenomenon and could not be the basis of a
permanent trend. At the end of the expansion, the country's non-
resource based sector was of only minor importance, so that, even
despite the fact it grew at a significant rate, it was not in a position to
replace the central role which the expansion of the frontier had had
in the past.
Although the growth of the Argentine economy had not been
particularly bad after the close of the frontier- 3·5 per cent per year
since I 9 I 8- the idea of a long-term economic failure has become
deeply ingrained in Argentina, being widely shared elsewhere.
The expansionary phase created extraordinary expectations,
blurring the fact that it was based on a process that was bound to
come to an end. But as the expansion was believed to be of the
neoclassical type, there was no reason to think that growth could not
continue unabated. Expectations stemming from a linear extrapo-
lation of the rates of growth of the years of the non neoclassical
expansion of the frontier were so strong that even in the face of an
acceptable economic performance, the image offailure has become
prevalent while in fact most people compare actual events with a
most improbable and unrealistic alternative. The oil producing
countries which in the twentieth century have replaced the
countries of recent settlement as the great resource based growth
areas, will also have to face the enormous difficulty of changing from
the relatively easier resource based growth, to a different, more
difficult, more sophisticated, non-resource based process. It is even
more absurd to extrapolate their past performance, as they run the
risk not only of reaching a stationary situation but even of reducing
their absolute level of income. The recent prosperity originating in
the post-I973 price rise can with even less reason be extrapolated.
It is clear that the price of oil is the consequence of a duopolistic
struggle, the final price determining not only the economic
 The Economics of the Frontier 223

neoclassical frontier but the extent of the transfer of the rent- and
quasi rent- to the more industrial economies, or quite conceivably,
from them towards the resource based economies. This depends on
whether the post-1973 prices are above the equilibrium competitive
price or not. If they are, an oligopolistic quasi rent will accrue to the
oil producing countries over and above their competitive rent. But
the question of their ultimate growth path depends, as in the past,
on what they do in the meantime, with their non-resource based
activities, a difficult task as they have to compete with the high
profitability (and rent) of their oil activities. To start and develop
the non-resource based sector too soon would be unwarranted, but
to do so too near the exhaustion of their oil frontier, would be an
equally serious mistake.
It would mean a reduction in their rate of growth and eventually
of income, as in this case, an end to oil discoveries would mean not
only a stop to production increases but an actual reduction of total
production.

RENTS, QUASI RENTS, NORMAL PROFITS AND THE

PROCESS OF GROWTH

Before concluding I would like to make a short comment on the

more general view that emerges from our story. Development seems
to be intimately related to the existence of abnormally high profits.
The Marshallian competitive 'normal' profits are quite alien to the
entrepreneur's mentality which looks at them as uninteresting or as
outright disastrous. Most of their efforts are devoted precisely to
achieving extra-ordinary profits by whichever means. The opening
of new lands is one of them, as it gives rise to the possibility of
appropriating the new rent, adding it to the normal profits on
capital, attracting people and capital to the frontier. The potential
rent can be divided in very different ways. At times, entrepreneurs
who are developing the frontier, whether railroad companies or land
speculators, get hold of the land and make abnormally high profits
from the appreciation of land values (Swierenga, rg66).
In other instances railroads may not wish to own land, being
able themselves to take their share of the rent through the
oligopolistic manipulation of rates, achieving 'extraordinarily high
earnings the result chiefly of skimming the cream of virgin natural
resources' (Innis in Neill, rg68).
224 Models and Methodology

But this is a situation that may not last. While during the frontier
expansion rent from land and profit from capital, being the
consequence of the same development, accrue to the same
entrepreneur, as the frontier closes the classic difference between
owners of rent-yielding assets and profit-making ones reasserts itself.
The manipulation of rates tends in due time to be restricted by
governments as railroads lose their association with the expanding
frontier. Earnings move back to the hated 'normal' Marshallian
profits, while the flow ofinvestment towards the now occupied lands
diminishes or disappears altogether. Still, at the end of the
expansion, the economy is much better off, as the new rent allows a
process of accumulation that was not possible before the expansion.
The frontier does not expand any more, but financing for a different
kind of growth process becomes available. But the development or
discovery of new lands is not the only way to obtain extraordinary
earmngs.
Technological developments can also be seen as an attempt by
entrepreneurs of the more mature economies to create oligopolistic
situations which-even if transitory-allow more than normal
profits by adding to them the quasi-rents brought about by the
transitory oligopolistic power of the innovator. The new countries
experienced their highest upsurge as a consequence of rents derived
from natural resources. To move from land-based, to capital and
technology-based growth, is not an easy task and it is one in which
many new countries have not succeeded. In such trying circumst-
ances it is tempting to replace technological quasi rents with easier
collusive quasi rents, derived from 'scarcity' rights granted to
business firms, (protective tariffs or quotas) or more generally
through some kind of collusion among business firms, restricting
market behaviour. In any case the search for rents and quasi rents-
of whatever character- to add to normal profits is one of the basic
motivations of entrepreneurs and investors, and is the basis for the
process of growth. Normal profits are of little interest, compatible
only with periods of modest growth. Rent-cum-profits, or quasi-
rent-cum-profits, are what it is all about, at least for entrepreneurs.
Discoveries of land, agricultural or mineral, discoveries of
technology, and restrictions on free competition, are all aspects of
the same process. The peculiar type offrontier movement which we
have analysed is but a special case of a rent-based process of growth,
a case that unfortunately has a transitory character and one that
poses a significant problem when it comes to a close- a problem, the
 The Economics rif the Frontier 225

intensity of which will depend on the success of creating a new quasi

rent-based stage of development which, if grounded on technological
innovation, will allow a more permanent and dynamic growth
path. If instead of just one big expansionary wave, as in the case of
Argentina, there are several territorial spurts, interrupted by non-
resource based growth, as in the case of the USA', the possibility of
continuing growth, based on industry and technology is much
greater. However, the trouble found by Argentina, after the close of
the frontier, may be more characteristic than the relative success of
countries like the USA, Canada, and Australia, which continued at
an unabated pace even when switching their process of growth from
a land-based to a capital-and technology-based process, a most
remarkable achievement that has to be acknowledged as such.
One may wonder if the latter are, after all, the more 'abnormal'
countries, indeed a fortunate abnormality.

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